Fastly

TikTok is old news, but it remains to be quantified. Today’s press release is short on details, and it’s likely little new will be available until the earnings call.

With that in mind, I looked at the AH pricing a “Prime Day” sale event and added modestly to my position.

🆁🅶🅱
post tenebras lux
For not in my bow do I trust, nor can my sword save me.

7 Likes

Perspective

The after-hours price is about $89 - same price it was on… September 24… about 3 weeks ago… I think it’s ok.

I don’t understand the tech, but from what I gather, the real potential for FSLY is the expected expansion from their compute-at-edge that is starting to launch. If that thesis is correct, this momentary dip is a small bump in the road.

Saw a good quote recently - don’t get emotionally attached to your paper gains. We have been feeling pretty good about the 30%+ jump in the stock in the last few weeks. It evaporated quickly. I believe it will return - but more slowly. Still a great company. Still my 3rd largest holding - even after the drop.

15 Likes

Overreaction. Totally reminds me of when Twilio tanked 25% due to Uber their biggest customer reducing usage by using other competitors. They came back with a vengeance later on that year and now they’re at $300+.

4 Likes

Hello~~ First post here (non-technical person). Bit intimidated but piggybacking off of Analog’s perspective above, presuming that the longterm investment thesis is still intact (and it seems like it is based on the overall feedback), the same stampeding that drove the price down today is mostly the same crowd that recently drove the surge upwards to ATHs.

So they just took back what they momentarily gave us. Would that be a correct way to view this?

Additionally, isn’t Q3 historically weaker per CFO from Q2 transcripts? Did I read it wrong?

https://www.fool.com/earnings/call-transcripts/2020/08/06/fa…

Will Power – Robert W. Baird and Company – Analyst

OK. Great. Thanks. Yes, I guess maybe just following up on that a bit, Adriel.

I wonder if you could just talk about more broadly the factors that are informing Q3 guidance. I mean when I look historically, normally you have a pretty good pick up sequentially from Q2 to Q3. And guidance assumes something that’s flatter to maybe down slightly at the midpoint. And so just trying to figure out how much of that’s conservatism versus maybe any change in trend? And I guess along those lines, it would be great to kind of get your sense for kind of what you have been seeing the traffic trends as you move from May, June into July?

Adriel Lares – Chief Financial Officer

Will, yes. So in general, we do see — we begin to see some pickup from sort of Q2 to Q3. I think the thing to keep in mind, clearly, is Q2 this year relative to previous years. Seasonally, Q2 versus Q1 is actually relatively flat.

Clearly, that’s not what we experienced this year. So I think you have a bit of a comparison challenge when you think about Q2 to Q3. So the fact that we’re still at the midpoint here, getting some pretty strong year over year growth rates, I think, is worth noting. So from our standpoint, we have built in last quarter the idea that folks would be coming — getting back to sort of a normal life from a shelter-in-place to be able from before.

And we’re beginning to see that sort of as a mixed bag. It’s mostly coming true. But that’s — what’s a little bit uncertain here is kind of how the rest of the world, in some respects, the rest of the United States is going to sort of play that out. So in some respects, the sort of the normal seasonality is sort of being sort of thought up in sort of Q4.

But with respect to Q3, it’s somewhat respective, ameliorated a bit by the comparison to sort of a very, very strong Q2.

Thank you,
Eddie

5 Likes

*Small correction “expected to be weaker” vs “historically”

good insight here. When FSLY pre-announces lower revenue like they did today, we must ask ourselves: What is going on and has their story fundamentally changed?

What is going on?

  1. TikTok didn’t buy as much as they thought, simple as that. But why didn’t TikTok buy as much as FSLY thought they would? There was a lot of uncertainty around TikTok (some of it politically based), which may have contributed to its lower than expected usage of FSLY. The release also mentions “a few other customers” but my guess is that TikTok was likely the primary contributor.

  2. FSLY was due for a slow down. FSLY ran up quite a bit over the last few weeks. There was even thought that a larger company (Google?) was acquiring shares in advance of a potential acquisition. Another part of the story is that FSLY was a darling of the “Robin Hooders”, traders looking for a short gain. News like this sends them running.

44 Likes

Whilst TikTok maybe the primary culprit, it can’t be all and The release also mentions “a few other customers” clearly highlights something more at play than just TikTok which needs consideration.

I had been still expecting a beat even with the TikTok factor but there is clearly something going on here.

Ant

6 Likes

I have a large position in FSLY and am not concerned about the TikTok usage issue.

What is slightly more concerning is the usage drop from other customers. I was assuming the guidance was conservative and their business with other customers would make up for any TikTok fluctuations… It appears that was wrong and the guidance was either somewhat optimistic or they are having issues with something. I was going to trim some in AH, but I think I will wait for the report in 2 weeks before I make any decisions.

Bnh91

2 Likes

What is slightly more concerning is the usage drop from other customers. I was assuming the guidance was conservative and their business with other customers would make up for any TikTok fluctuations… It appears that was wrong and the guidance was either somewhat optimistic or they are having issues with something. I was going to trim some in AH, but I think I will wait for the report in 2 weeks before I make any decisions.

Indeed. They were quite vague about the loss of revenue from other businesses. With the recent increase in price, any loss form TikTok seemed to have been priced in. However, decelerating growth does warrant a haircut on their market cap, just not sure it should have been 30%. The price reduction
assumes the guidance to be at $70 million with forward guidance being slashed considerably as well.

I feel it is super hard to make any valid judgments at right now because they have given us so little information. We need to know what’s the basic cause of the deceleration. Actually I don’t think their fundamental story has changed, just like AYX, but they may experience some headwind. How long and the scope of the headwind is the critical information we need to make a decision. Whatever, I will wait for the conference call.

Fastly’s customer base is concentrated and their billing is primarily usage based. To me this is as simple as usage not increasing as much as they expected based on the April-June quarter. I would not be surprised as pandemic related stay at home trend was somewhat lifted over the past quarter. Unlike other companies where their expansion rate is due primarily to adding users or services, at least some of FSLY’s growth was simply attributed to increased demand that could easily have decreased or leveled off. And while other companies followed by the board are experiencing growth because of business usage, which is going to be much slower to revert to pre-pandemic practices (if at all), FSLY was relying on people staying at home and shopping online or watching videos.

Contrasted with NET, which is more of a subscription model, and should have more reliable revenue expectations.

For me, FSLY is attractive as a combination of a relatively fast growing company (which should be boosted by the Signal Sciences acquisition) and also a play on the future of edge computing. While I’d love for their growth to continue in the 60%+ range, anything over 40% would be enough to keep me in as long as their long term prospects remain bright.

31 Likes

Well, I was expecting raised guidance from Fastly, not lowered guidance. This reinforces the point to me that as investors, maybe sometimes we just don’t have all the information we need to read between the lines.

This is where management comes in.

In an interview in August, Bixby asserted that the TikTok risk had been ‘baked in’ to guidance - albeit he did so in an evasive kind of way (that was my gut feel at the time):
https://discussion.fool.com/quick-fastly-ceo-video-appearance-34…
Management also reassured us that it was baked into guidance in the Q2 earnings call.

Now Fastly have just announced “usage of Fastly’s platform by its previously disclosed largest customer (TikTok) did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer”.

So taking management at their word either 1. Fastly did NOT bake in TikTok to their Q3 guidance but just their FY guidance or 2. They were not prudent enough doing so.

TikTok was the most downloaded non-gaming app in the world in August (https://www.businessofapps.com/news/tiktok-most-downloaded-n…) - so how did usage not meet expectations? Well as fortun8 has suggested, TikTok was banned in India in the quarter (its largest user base), so perhaps this was an oversight.
However, US TikTok is half of TikTok revenues. It’s hard to see how this usage also decreased dramatically quarter on quarter.

The other part of the release:

“During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated”

I don’t like this line at all. The glaring omission, is WHY did these ‘few’ customers have lower usage. But what I really don’t like about it, is the ‘latter part of the third quarter’. What happened in September compared to July that so affected usage? Did the schools reopening have much impact (presumably now students are back to learning they don’t have as much time to go on TikTok)? Are these the same customers in the travel and hospitality industries that were impacted in Q2? The statement is open ended. The implication of course is that because it’s in the latter part of the quarter, usage is running of a lower base going into Q4. Is there a deceleration or just a temporary impact?

It feels like a repeat from Q2, when there were heightened expectations ahead of earnings due to an explosion of traffic in some of Fastly’s largest customers. However, that usage upside did not materialise, and the share price plummeted. Then it seemed apparent that the usage upside for Fastly was capped somewhat and doesn’t correlate to revenue 1:1.

My first impression after Q2 earnings was that with a slowing of Enterprise customers and usage (which drove the spike of revenue in Q2) assumed to be running at run rate going forwards, what was going to continue to accelerate Fastly’s revenue before Compute Edge becomes realisable? (https://discussion.fool.com/what-really-jumps-out-at-me-reading-…)

I thought we had the answer since then, primarily in the form of Signal Sciences, assumed usage upside and TikTok impact aside. I understood that it would be ‘immediately accretive to revenue’ as per their initial press release, and the acquisition was finalised in quarter. I can only assume that a full year’s worth of revenue will be shown in their Q4/FY report and updated in their FY guidance (if the latest guidance did include Signal Sciences revenue, that really would be worrying).

Has the story changed? Yes and no. It has changed in terms of Fastly has gone from quarter on quarter acceleration to deceleration, on the face of it suggesting its Q2 spike might have been a one off. But if we take a step back, what has really changed between Q2 and Q3? 1. The acquisition of Signal Sciences, which I believe is a long term benefit for the company (regardless of how it’s recognised this FY). 2. Partnership with Google Cloud, opening up new possibilities for Fastly to grow. 3. We are one quarter closer to Compute Edge becoming realisable.

Therefore it seems to me, if you did not sell after the Q2 sell off following earnings, why would you sell off now? The TikTok risk was a known factor, but perhaps should have been navigated better by management. Questions need to be asked of them, but at the same time I remind myself - Fastly has always been consistently lower growth and lower margin than my other holdings and its Q2 acceleration was dependent on usage. My long term thesis revolves around the opportunity for Fastly, an $8bn company today, in the future becoming a much bigger company in a budding industry. This hasn’t changed from a 5% earnings miss primarily due to TikTok. While I’m less certain of usage upside going forwards, Fastly’s mid to long term prospects still seem favourable to me.

From all this, I would like management to be more transparent where possible, so that I don’t need to go trying to predict my own (wayward) guidance :slight_smile:

81 Likes

Agree with the comments saying “dont overreact” until we have some more colour when they report the quarter.

I, as well as others, was scratching my head as to why the price ran up so fast on no significant news. To me it this 30% drop is just be a bit of “what goes up must come down”, unless supported by business fundamentals. Fastly now gave us some clarity on the fundamentals (thank you)and the October rally was not supported. Bu! hu! As Saul usually does, let’s put it into context. Fastly is still up about 350% YTD, +10% over the last month and roughly unchanged since end of September…

Needless to say, it will be interesting to understand what Fastly HQ is seeing soon…

Nik, still long Fastly and Cloudflare

5 Likes

Fastly is a great reminder that investing is not an escalator to financial heaven but more like a wild ride on a rollercoaster specially when one invests in high growth, high volatility stocks. From $10.63 in March to $87.75 pre-market is not your calm stroll in the park. It also shows the prudence of Saul transferring 4% out of the market to his reserve fund on Monday.

I don’t pay attention to day to day noise. Was this noise or a fundamental worsening of Fastly’s business model? It’s a call that each of us have to make. My call is that, from a longer term perspective, it’s just noise which means that there is no reason rash action. From a short term perspective this knocks FSLY from second to third place and something might have to be done.

Before I leave, remember that during extended hours there are far fewer active players than during regular market hours which means even more price volatility. Unless you have good reason to trade pre or after market, don’t second guess yourself. I’ll probably take advantage of the dip but there might be another on earnings day (Nov 5?). And expect lots of ambulance chasing lawyers to try to make a buck.

Denny Schlesinger

34 Likes

Denny,

In today’s preliminary release, it mentioned “On October 28, Fastly will release full third quarter 2020 financial results, along with fourth quarter and full-year 2020 guidance, which will include revenue from Signal Sciences.”.

Will Q3 ER is now Oct 28.

Zoro

2 Likes

My take is that TikTok is definitely part of the miss but not the whole store. Could it be that Oracle gave a 30-60 notice to FSLY about moving over to their own ability to now run TikTok? I think too that it is multiple other companies in which may be hurting so didn’t use FSLY as much as they normally due in which hurt the bottom line. The 1 key item I think that is going to make them go down more is that the 70-71M also includes revenue from Signal Science in which their miss is worse than what they anticipated.

Sure these guys are smart by rewriting everything from code and making everything quicker, but so far its only in relation to their CDN’s. Overall the whole growth part/story to FSLY is the edge computing which is still in Beta with no revenue. More than like end of year guidance and Q4 will decrease resulting in a larger sell off but with hope that their edge platform will eventually allow them to continue to grow at a quicker rate. I just think for a lot of people on this forum, folks will not want to stick around since they may be projecting in the 30% range. In the end I think the story is further down the road and this is really just a bump in the road.

BarrelHaus

7 Likes

On Oct 5th(10 days ago) Fastly was around $95.00!!!

1 Like

The Tik Tok revenue hit to FSLY is obviously coming primarily from the fact that India and Pakistan has banned Tik Tok.

At least that is obvious to me and i thought it would be helpful to repeat that point mentioned here a time or two but which has drawn little attention. This issue has not been mentioned at all as part of the problem on CNBC.

The FSLY CEO also said there were other causes of the shortfall which have not been discussed publicly to my knowledge.

1 Like

As much it hurts to see FSLY drop so much in one day, enough to move it from my #4 holding to #6, I need to remind myself I am still up nearly 100% in my position, which includes 9 buys from $20-$80 between September 2019 and August 2020. I am mentioning this because I learned on this board to buy on the way up! Still pondering whether to add or hold until more information is available. Thanks to all who have contributed their insights.

The Tik Tok revenue hit to FSLY is obviously coming primarily from the fact that India and Pakistan has banned Tik Tok.

How much business does Fastly do in India and Pakistan? I haven’t been able to find information on that.

I have taken the opportunity to buy more of Fastly on the 15th and 16th because I believe this is a minor bump in the road.

Razz

1 Like