Fastly is the leader in edge compute, driving the massively valuable shift of compute processing to edge servers. The stock is down over 20% today after announcing tepid Q2 sales guidance (below our & analysts' estimates) and the news that it will be transitioning to a new CFO.
Below is our analysis of what went wrong with this Q1 earnings release, what management's forward guidance may imply, and how we're thinking about the stock.
First, a quick reminder on what Fastly does:
Overall, Q1 results were generally solid:
Unlike the Q1 results, Fastly's Q2 guidance and its implications for the remainder of 2021 were mixed to negative.
On the plus side, management did raise its full year 2021 revenue guidance to $380-390M, implying a major acceleration into the 2nd half of the year (38-42% growth). Their reasons for this guidance included land and expand opportunities, cross-selling and better sales execution.
The company is suffering from an "air pocket" of tough 2Q20 comparisons while the Signal Sciences acquisition and important product efforts (Compute@Edge) have not yet kicked in. The weak 2Q21 guidance and the CFO resignation news were the nails in the coffin for the stock today.
It's clear that many investors are not buying that full-year guidance (and the 2nd half ramp it implies) and need to see a quarter or two of improving execution before trusting guidance again.
In some ways, these quarterly results and FSLY's sharp sell-off reminds us of our experience with Twilio in 2nd half 2019.
At the time, we published an update explaining our napkin math on the long-term Twilio opportunity. To summarize our thinking: "Bears are assuming Q4 sales guidance is representative of the next 3+ years for Twilio. We disagree." We stuck to our thesis and held onto the position for our Flagship strategy despite the short-term volatility. The stock is up 200%+ since then.
The jury is obviously still out on whether FSLY will end up looking like TWLO (i.e. this Q1 release being a one-off execution failure in an otherwise strong secular growth story), or if the fundamentals are breaking down (with an optically high EV/Sales valuation multiple to boot). The stock is now a "show me" story: we need to see improving progress in the coming months to reassure ourselves that our long-term thesis is tracking.
At the current valuation, we believe FSLY is quite attractive -- if you believe management's guidance. That's a big if, to be sure, and the reason the stock is down so much today.
We do continue to believe in our original 5-year thesis for the company and are tempted to buy more of the stock here, but we need clearer signposts first.
For now, we are holding onto the stock and not selling based on one quarter's results alone. Our thesis has always been a long-term one to be measured in years, not quarters.
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