I'm not adding to FSLY

Investment Analysis Clubs Saul’s Investing Discussions
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I was quite fortunate to trim FSLY multiple times this month as it crested $120 and then 130. I couldn’t figure out why it was going up. Also, my position grew to a larger percentage of my portfolio than I was comfortable with. But even after trimming, it was a 10% position for me at market close yesterday. Today that percentage dropped considerably, of course. But I’m not adding on this “dip.”

Yes Edge is on the horizon (somewhere). Yes Signal should help. And yes, the Google partnership is promising (who knows, maybe Google could buy FSLY). But that’s not how I invest.

The problem is, these are unknowns, just like the unknown of why FSLY went to $130+. I don’t want to bet on unknowns. 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:

  • other clients besides TikTok are down in September (big yellow flag at least)
  • revenue declined sequentially
  • usage model may be challenging
  • enterprise customer growth has been single digit numbers per quarter

Not all of this is new, but some of it is. I’m not anchoring to a recent post-spike share price and declaring FSLY undervalued now. I’m not buying back what I trimmed. FSLY is about a 6.5% position for me right now, and I don’t know if I’ll trim more, but I’m not adding today.

Bear

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I too have pulled back on FSLY. I was quite disappointed in myself that I said I was going to trim positions on Thursday that had massive run ups for no reason. This of course was one day too late but I am trimming down FSLY and would only add back if it went back into the 70’s. That report gave me the warm and fuzzies in all the wrong places and expect it to drop more after their earnings.

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Yes Edge is on the horizon (somewhere). Yes Signal should help. And yes, the Google partnership is promising (who knows, maybe Google could buy FSLY). But that’s not how I invest.

I’m assuming the “not how I invest” is for the parenthetical potential buy-out phrase only. Because what Fastly is doing with Signal (Secure@Edge) and the still in beta Compute@Edge are the main drivers for my investment in the company. They represent additional growth areas for an already growing company in my view.

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.

In this case, so far, I’m still comfortable with my investment in Fastly.

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Here’s how I’m looking at this issue…

Premise: FSLY’s revenue is usage based. That usage comes from FSLY’s different customers. So, if the customer/s usage drops, FSLY’s revenue drops.

Conclusion: Now, why did FSLY’s customer/s usage drop? I don’t really care unless…

  1. Did the revenue drop due to some flaw in FSLY’s technology/support? So far the answer is “NO”.

  2. Is the usage based revenue model a good model? I don’t know.

So, for now I’m holding onto my shares. Neither selling nor buying ( since they are up a lot for me even with today’s drop). On a brighter side, ZM is doing well today and offsetting some of this.

Cheers!

ronjonb

p.s. Just pondering that if I were to launch a TikTok rival service today that requires the same standards of performance, availability and ease of purging caches and deployment, I think I would go and use FSLY. Else, chances are my service won’t be as good as TikTok.

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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.

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I am not very skilled in finding past posts here so I will leave it to the skilled members. I do remember the CEO of Cloudflare mention in their earnings report customers were complaining about the cost of Fastly’s services but did not mention FSLY by name. Maybe he was foretelling of the drop in Fastly’s usage and now are client of Cloudflare. Maybe this is speculation and off topic if so delete.

Mitch

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These are good points Ron…

Just to keep some perspective…

  1. The revenue growth drop was from 60% to 40% but YoY it still grew 40% when it’s single largest user took a hit in India and Pakistan (Twilio’s fall from grace was far worse as was Alteryx)

  2. Looking back at previous quarter to quarter progressions, Q2 to Q3 last year was the lightest sequential growth and so it doesn’t surprise me that this Q2 to Q3 is soft anyhow compounded by Tiki’s Tok and others

  3. As for consumption based vs subscription based model advantages - I can’t claim to know which might be better however for sure i) internet consumption is growing faster than internet connection activation ii) video and high bandwidth consumption is out growing text/static internet low bandwidth consumption iii) Edge is out growing traditional iv) 5G is literally only just starting and with Apple releasing its 5G phones, demand from 5G for edge computing should really explode together with strong tail winds from IoT where speed is essential e.g. autonomous driving vehicles etc.

I’m willing to hold as I see immense fundamental potential for growth on a mega trend basis which whilst not as large a TAM is certainly on a par with e-commerce and digital advertising from a certainty perspective in my mind. There’s absolutely no way anyone is going to stop using edge computing infrastructure consumption post covid whilst I don’t think we can hold the same certainty for other plays (e.g. Peleton etc).

Ant

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I’ve owned FSLY a while, and it is still my largest holding. Someone on this board (can’t remember who) clued me into NET. I added a decent position in short order. On 6/12/20, I sold my NET position and bought more FSLY with the proceeds (although not important for this post because I believed that FSLY was the preferred enterprise choice solution - Saul’s just sold FSLY for NET with this data point pointing the other way. I’ll look into this after earnings).

The point of this post is that FSLY is a very volatile stock with very large swings. The current sell off is actually the 4th big “correction” of the year. Here are some huge swings this year based on closing prices (high-low were much greater):

FLSY 07/09/20 $102.72
FSLY 07/14/20 $ 81.87 -20.30% S&P +1.44%

FSLY 08/04/20 $116.18
FSLY 08/11/20 $ 74.96 -35.48% S&P +0.83%

FSLY 09/01/20 $ 95.40
FSLY 09/04/20 $ 80.92 -15.18% S&P -2.84%

FSLY 10/13/20 $128.83
FSLY 10/15/20 $ 89.70 -30.37% S&P -0.75%

01/01/20
FSLY +336.07%
NET +252.19%
S&P + 7.51%

06/12/20 to 10/15/20
FSLY + 91.59%
NET +108.81%
S&P + 14.20%

Mike

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Just to keep some perspective…

Ant,

I pretty much concur with what you’ve said.

Since, there have been a lot of opinions from many of us leading to the different actions on FLSY ( wait & watch, sell all, sell some).

I’m the “wait & watch” guy on this as I’ve been a developer my entire career and have followed FSLY’s technology quite deeply for a while now. Though that may not be the best strategy from a business perspective but I’m quite optimistic about the future of edge computing, IoT and the Internet.

On this weekend, for everyone who may still be holding FSLY or may buy back again, please listen to this podcast if you haven’t: https://www.youtube.com/watch?v=mk8DuY-wFk8

FSLYs has been built by some of the best and most passionate guys out there…and I feel we’re in very early stages.

Cheers!

ronjonb

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After reading Saul’s, Bear’s and almost every post about FSLY in the past few days, it appears we’ve reached a point where tech superiority doesn’t matter anymore in this board compared to traditional business methodology and growth. In essence, how we developers feel about the technology that’s shaping the future doesn’t seem to matter as much as quarter to quarter growth. (That makes me think why why Mr.Buffet after all these years chose to invest in SNOW? … another usage based business ?).

I’m not sure about the history, but I feel TSLA is banished on the board (even though it has re-defined the Automotive industry) and changed the course for the future for cars. ( compare Ford, GM and TSLA’s market cap today compared to 3 years back.)

I own a Tesla Model S for the past 4 years ( and a sense of pride feels me every time I drive it) in addition to my BMW. I can testify that that Tesla is way ahead of BMW in almost every aspect ( specially in terms of what it’s trying to do with it’s AI).

Now, coming back to FSLY; it seems that many investors in this board are trying to ride the benefits of high flyer’s ( disregarding the effort and work that goes into re-defining the future of edge computing and IoT). I would also ask a question to many who have sold out of FSLY into NET; do they understand how WebAssembly works? All that collaboration work that’s going on with developers from Fastly, Shopify and Google and others to build a better and secure Internet (have you ever tried to check their collaborative work on GitHub?). Unfortunately this is going to be my last post on this subject as I’m a purely tech guy and this board is too much focussed on business and the performance of the next quarter.

Cheers!

ronjonb

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Now, coming back to FSLY; it seems that many investors in this board are trying to ride the benefits of high flyer’s ( disregarding the effort and work that goes into re-defining the future of edge computing and IoT).

No one is disregarding the effort or work of edge computing and IoT. In fact, it is quite the opposite since these efforts are what we are banking on to make many of these investments work. It is an individual choice how long one wants to wait for that work to show up on the bottom line. That is not only still TBD with Fastly but arguably more TBD today than last week. That’s only one opinion though, and it hasn’t kept many from continuing to ride the FSLY train.

Unfortunately this is going to be my last post on this subject as I’m a purely tech guy…

I hope you don’t feel tech guys are undervalued around here. I don’t recall anyone disparaging tech guys, and I believe the contributions of those like yourself are invaluable. There’s a reason several people have begged muji to weigh in on this over the last three days. I would personally be disappointed if you stopped posting your technical thoughts.

…and this board is too much focussed on business and the performance of the next quarter.

You say that like it’s a slight, but focusing on the business is the whole point. As a tech consumer, I buy an iPhone. As a tech investor, I buy Apple the company. Apple’s stock funds my retirement, not the iPhoneX sitting on my counter. If Apple’s tech doesn’t ultimately lead to success for Apple’s business, I have likely made a mistake by purchasing the stock.

In the now 100+ posts on FSLY, I’ve yet to see anyone say Compute@Edge sucks or FSLY’s tech is falling apart. In fact, I’d say the general respect for Fastly’s tech remains very much intact. The discussion has been entirely about the execution and potential of the business. In all honesty, that’s exactly the way it should be. This isn’t Saul’s Technology Discussions. It’s Saul’s Investing Discussions. FSLY’s merit as an investment is ultimately what matters most.

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it appears we’ve reached a point where tech superiority doesn’t matter anymore in this board compared to traditional business methodology and growth.

Ronjon,
I think you have identified a key point for investors. By far, the biggest blunders I have made as an investor is over reliance on impressive technology, while discounting business performance. Infinera has as far as I know the best optical transport technology. The total cost of ownership of INFN technology was thought to be superior to all of their competitors. However, the business has not performed as predicted over the past decade for reasons that I don’t completely understand. Revenue growth is the first thing I look for now. It is the first and clearest signal that the most important people, the customers, think that the technology is worth spending money on. Without that you can have great technology, but as a business (and investment) it will not thrive.

Oli

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Hey Rainy Day Fund- “I do remember the CEO of Cloudflare mention in their earnings report customers were complaining about the cost of Fastly’s services but did not mention FSLY by name. Maybe he was foretelling of the drop in Fastly’s usage and now are client of Cloudflare.”"

Excellent catch. Matthew Prince said this at the Q2 conference call on Aug 6th, 2020.

"COVID-related concession requests peaked in early April and had been tailed off. We came in well below what we forecast for potential downside. Today, much more so than on our last earnings call, we feel, we have clear visibility into the effects of the pandemic on our business that has given us the confidence as Thomas will detail to raise both our Q3 and our annual guidance. That competence comes foundationally from our very predictable and consistent business model. The vast majority of our revenue, more than 95% we’ve built upfront on a subscription basis that generally gives us good visibility into our future results.

Another consequence appears to have been and we saw the peak in customer concession requests earlier than other companies that fill in arrears on a more volatile usage basis. One thing we are seeing increasingly is customers who were surprised by their large usage based bills that other vendors now coming to us for predictable consistent pricing. No one likes to be surprised by a bill. And we believe the consistency of our staff approach is not only more predictable for us, but also builds trust and wins loyal customers over the long-term."

https://seekingalpha.com/article/4365592-cloudflares-net-ceo…

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Great discussion on Fastly. Here is my only post. Back in August, I had pointed out Fastly’s anemic enterprise growth over several posts here:
https://discussion.fool.com/so-8-years-from-now-with-a-10-churn-…

I was really surprised that the CEO quoted that they will get to 30,000 to 100,000 enterprise customers. He said that in the EC and repeated that in at least one other investor call. I had felt that after the temporary usage spike due to covid wore off its usage would drop to 40% like in 2019.

But since then after reading a large number of posts here and elsewhere, I became convinced of Fsly’s superiority in its edge computing technology which I still believe by the way. With that and its Signal Science acquisition, I felt its revenue could grow to 55%+. As a result, I increased my conviction level in the stock to make it one of my highest by weightage. By early last week before the drop, it had grown to nearly 15%. The drop brought it down to around 10% and over the last few days I have sold it down to around 4%.

Lesson learned - Given that there was no revenue coming from edge-computing yet Fastly should always have been a medium conviction position. My error was to make it a high conviction position. I did not lose a lot of money but lost in opportunity cost.

Another interesting thought - the MF mantra is to ride these things out and hold for 3+ years since ups and downs are always likely even with great companies. This approach works fine if you held 20 stocks with position sizes of around 5%. In fact, DG preaches that and has been quite successful with a CAGR of 21% since 2004 despite having to pick 2 stocks every month.

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Following is my plan fellow Fools

  1. Iam planning to sell 100% of my FSLY (in my Taxable Brokerage Account - ouch) due to the anemic growth rate of Enterprise customers quarter on quarter as Saul indicated that comes to around 2%. My plan is to sell FSLY immediately and buy PTON immediately after posting this in our boards (in order to retain the inertia and avoid the over-analysis paralysis).
  2. The Management botched it up and I am not planning to wait around a couple of quarters till they get their act together – especially with the holiday season upon us (reason mentioned below)
  3. Banking purely on Tech - Good technology and a great team without the numbers to speak for – risky like Pivotal or Infinera
    Could this be a bad move on my end? It could very well turn out to be. I hope I am wrong and wish all FSLY holders amazing returns. But I would like to be ruthless in capital allocation according to the tenets of this board
    What were my choices? ZM, NET, adding to TDOC or adding PTON
    I decided against ZM since it is already an outsized part of my portfolio, comparing NET and TDOC I chose PTON due to my personal preference mentioned below
    I decided to go with PTON mostly with a long-term perspective and for the blistering growth they have been enjoying for the past few quarters. I feel bad for not having invested in PTON for the last 1 year along with a feeling of remorse that I am buying after the stock has already 6xd. But I have been around the fool forums long enough to realize the folly of price anchoring and not to let past remorse stand in the way of possible future returns. Considering we have the holiday season around the corner and this is a COVID induced holiday season are factors that played into my evaluation. US has enough affluent families that can afford the Peloton bikes for cash and for the rest they have the 3-year bike subscriptions. If you cannot afford both you can enjoy the app alone for a subscription. As I said in the beginning of this paragraph my motivation is to be in it for the long term but if a ‘Peloton does a Fastly’ in the name of Apple Fitness then I will be ruthlessness again.
    I decided on Peloton because 1) It is easy to understand as a business unlike FSLY or NET to a certain extent 2) easy to like the company that’s helping people stay healthy 3) It becomes a habit & part of a person’s identity and is a sticky business due to that 4) International growth has not started yet 5) It has the highest growth rates among all the stocks we discuss here with the exception of ZM. I am currently in the 30 day trial of Peloton app and who knows I might surprise myself by buying myself the bike for the holidays.
    Thanks a ton to all for sharing your investing principles with me and all the other board members here
    This has been a new learning experience publicly sharing my investing process (but one that primarily adds value to myself first), but I am not the first one to do it in this board and there is frankly a lot of value in coherently putting your thought together.
    I plan to add more value to the board in the upcoming days.
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Hi Texmex (great name by the way!)

I’m sure you didn’t mean to imply this, but it sounds like your conviction was tied in to the price performance. You sold in a dip when the company hasn’t really changed in the last few weeks. Sure they guided a little differently but it was 25-30% different. The market gonna market.

Compute@Edge is still in beta. I’m not investing in this yet since it isn’t live. I don’t think anything has really changed. The stock PRICE ran up then ran down. I haven’t touched my holdings. My conviction is the same. It could change in the future of course but it hasn’t yet.

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I’m sure you didn’t mean to imply this, but it sounds like your conviction was tied in to the price performance.

No, you are misunderstanding. The company has great edge computing technology. But it is still not making any money yet of it yet. So, still unproven how much that will add to revenue growth. This unlike other companies that are actually attaining high revenue growth rates by selling their product. Under this circumstance, it was not prudent of me to make this a high conviction position. I should have left it as a medium conviction position which for me would be a 5% position. That is essentially what I ended up doing. Just my way of thinking.