I want to bet on company performance and the numbers they are putting up. And FSLY not only missed their guidance (which companies should never do), but there are other challenges:
Maybe I should be more prudent and invest only when the “numbers they are putting up” are already showing the effects of those new initiatives? My investment in Fastly was not predicated on growth in the CDN business, which, btw, is still growing.
Hi Bear, Smorgasbord,
I feel like I fall somewhere between your two views, in terms of Fastly’s performance as a CDN and its ‘Compute Edge’ & ‘Secure Edge’ opportunity. After all, how can we invest in one without the other.
In terms of investing in Fastly as a CDN pure play, there seem to be other higher growth, higher margin businesses with more inspiring management which might be a safer bet, many with accelerating sequential revenue - something which Fastly can no longer boast. But then we knew this in Q2.
Bear, I agree with all your points and share your concerns. I am particularly keen to understand the usage drop in September beyond TikTok. And I am concerned that management had not dealt with this guidance transparently or perhaps prudently enough. However, I don’t see it all as doom and gloom:
While declining sequentially, this is still +12% on Q1. Which is ahead of the comparative FY19 growth rate (+9% between Q1 and Q3 FY19) and so represents YOY acceleration at the same stage. This is in spite of current geopolitical factors on its largest customer (again customer concentration is perhaps to be expected in early stage growth). And management HAD flagged it was a tougher comparative vs Q2 this year.
The usage model and Enterprise customer growth numbers are linked, Enterprise customers (>$100k) are net of churn. The lower Enterprise customer numbers in Q2 were because of a drop in usage from hospitality and travel verticals. However total customer numbers were up a record amount in Q2, indicating potential pipeline to conversion into Enterprise customers. The 42 Signal Sciences new Enterprise customers should also contribute to this.
I’m not sure I agree with MemTiger65 that the market will necessarily sell off after Q3 earnings. After all, Fastly WILL report $70-71m revenue in Q3 in a couple of weeks. It has already been actualised (quarter ending 30th September) and is arguably priced in now. I think management comments and forward guidance will be key. Fastly have indicated their FY guidance will include Signal Sciences. I am interpreting this to mean c.$30m of revenue, which means Fastly will raise their FY guidance regardless of TikTok impact. Perhaps this is also already priced in.
While TikTok remains uncertain and a risk in the short term, there is still the strong seasonality of Fastly’s Q4 to come, guided to be +18% (as in last year). I am less inclined to overestimate the usage impact of e-commerce this year on its Q4 given the last couple of quarters, but there is still a possibility of a positive surprise. I am looking for clarification from management over what they have actually ‘baked in’ to guidance for TikTok.
Momentum. Fastly is highly volatile and a relatively ‘smaller’ cap (compared to most on this board), we have seen both the upside and downside to this in recent weeks. This obviously works both ways, but I will wait until the Q3 earnings call to make further judgement.
As to whether or not I’d be adding to Fastly in the near term, well that depends on everyone’s situation and risk appetite I guess. I am invested in Fastly for a combination of its company performance, its value as a proposition (which people with far more technical knowledge than myself present persuasive arguments for) and its long term opportunity (of which Compute Edge is part). After all, at a $8bn market cap I feel I can adopt a longer term view and give Fastly a quarter or two more leeway, than I could perhaps a larger cap already in a more mature market.
For myself, my portfolio is very young and where cash contributions over the next few years will make a difference. When the share price rose to $130, I was also tempted to trim and reallocate, but I then questioned why I would trim just because of a price rise and whether I was comfortable with a 20% allocation. All things considered, I decided that I was. If I had a more mature portfolio, perhaps I would have made a different decision. That’s up to everybody to ask themselves the same question.