Thursday, Oct 29th 2020

Three takeaways from Fastly's Q3

Update

On Wednesday after hours, Opportunities stock Fastly rose +2% after reporting in-line Q3 earnings and guidance.

We believe the price action reflects easing investor concerns around its pre-announcement several weeks ago, when it reduced guidance after seeing spending reductions from its largest customer, TikTok.

Our top 3 takeaways from the quarter are below:

1.) Primary issues surrounding the Q3 pre-announce are now largely in the rear view

Management signaled that the core driver of spending cuts at TikTok were (as expected) broader political uncertainty around whether TikTok would be able to continue its operations in the US.

The implied incremental weakness outside of TikTok also turned out to have a lot more bark than bite, and were attributed to timing fluctuations not expected to impact business beyond the Q4 quarter.

We see reduced uncertainty around TikTok's future as a potential source of near-term upside for Fastly, but do not see it as a core driver of Fastly's long-term thesis. Which brings us to our second takeaway…

2.) TikTok aside, Fastly's core business continues to show remarkable strength

Beneath the Q3 noise, Fastly's core business and product-led growth thesis remained strong as ever.

This was most evident in the outstanding dollar-based net expansion (DBNER) numbers the company posted in the quarter, which rose an impressive 10% sequentially to 147%.

This number represents a key metric for software businesses, as it loosely shows how aggregate spending from "existing customers" is trending, making it a great window through which to assess the strength of Fastly's product suite.

Customer growth also remained strong as Fastly posted the second-highest quarter of new customer additions since it went public.

We believe these two metrics are key levers to Fastly's long-term growth algorithm, and are why the company should continue to perform regardless of spending at any particular customer.

3.) Long-term growth playbook remains intact

With its outstanding value proposition and core enterprise penetration / customer wallet share both still in single digits, we're optimistic on Fastly's long-term growth outlook.

In its earnings release, Fastly quietly announced that its edge compute product, Compute@Edge, was finally moved out of beta and has been receiving positive feedback from its initial production customers.

As we've highlighted before, we see Fastly's potential in the rapidly growing edge computing vertical as a major secular growth opportunity, and look forward to seeing it develop into a bigger piece of the company's narrative amongst investors.

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