SSI - Fastly Q2 recap

Investment Analysis Clubs Saul’s Investing Discussions
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Peter Offringa has written his deep dive into Fastly’s Q2 performance:
https://softwarestackinvesting.com/fastly-fsly-q2-recap/

I found it particularly interesting his take on the TikTok risk, as an indication of how strong Fasty’s proposition is in relation to its competitors:

More importantly to me as an investor, though, is consideration for how TikTok became such a large customer and what that says about Fastly’s solution relative to other CDN providers. Granted, TikTok is likely using more than one CDN, but an annual spend of $36M total on a single CDN provider is significant.

His view on Enterprise customer growth (as featured in previous threads):

The increase in enterprise customer count in Q2 represented only 7 customers moving into this category and was the smallest sequential increase in the past 12 months. However, management noted on the earnings call that some customers in impacted verticals, like travel and hospitality, actually dropped below the $100k spending threshold in the quarter. They didn’t provide detailed counts for customers moving up versus moving down.

Fastly has many long-time customers in travel and hospitality, like Kayak, Airbnb, TripAdvisor, Ticketmaster and Hotel Tonight. These companies have reported significant reductions in usage year/year, over 80% in some cases. It is understandable that they would be impacted. Presumably, as macro conditions improve, these customers will return to normal spending. Airbnb, for example, recently announced that they resumed over 1M bookings per day on July 8th, after falling below that count since March 3rd. Also, on the recent Oppenheimer analyst call, Fastly’s CEO mentioned starting to see “green shoots” of new activity with travel customers in June/July.

He maintains a bullish and outsized position, with a ratio of 2:1 to Cloudfare, and implies he is going to upgrade his 4 year price target of $155 which would be ‘easily achievable’.

Just the light touch view here with a couple of personal interest points, I’m sure some of the ‘techies’ on this board can provide some more comprehensive insight :slight_smile:

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Nice deep dive as usual, but also noted is a link to Muji’s blog:

For a general background on Cloudflare, you can review a Hhhypergrowth article from February that provides an informative explanation of all of Cloudflare’s offerings. The Hhhypergrowth blog is written by a peer analyst with a strong technical background.

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Observation - a couple weeks ago Peter had zero NET and 9% in AYX.

He now has zero AYX and 10% in NET.

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What really stands out to me. Their customers must really love the product. NRR of 138%!
“Dollar-Based Net Expansion Rate (DBNER) was 137% in Q2, which is up from 133% in Q1 and 132% in Q2 2019. Net Retention Rate (NRR) was 138% in Q2, up from 130%”

I am playing both of the horses leading in this race by holding both FSLY and NET. FSLY got ahead of itself with a quirk super big quarter. But that was then, this is now. Will the Pareto rule apply here, or will it be a duopoly? I have no idea. BUt all Fastly has to do is to maintain that 138% retention rate to qualify as a fast grower even without new customers.

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What really stands out to me. Their customers must really love the product. NRR of 138%!

Considering they bill based on usage, this might not mean as much as it seems. The system is in place and if usage spikes, spending spikes, regardless of how they feel about the product. Many of their customers saw an unexpected jump in usage, while others fell dramatically (travel sites).

Overall it’s a positive but I don’t read too much into a one time bump.

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Cloudflare’s CEO Matthew Prince said this in their Q2 conference call on August 6th.

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.

Could be a reference to Fastly.

I’m long NET 9.8% and FSLY 4.6%

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