I’ll leave aside Fastly’s extreme valuation multiples. Or how it fits into a larger tech bubble, in general. Or even how Fastly is just another CDN (Content Delivery Network), of which there are many, including some owned by the largest cloud operators, and some operated by the telecom operators themselves. This makes CDNs an intrinsically competitive market where high margins are not likely to exist for long.
I’ll leave those angles aside, as they are simply good reasons for Fastly to trade much lower. But I believe there’s a larger theme which also deserves attention. That theme is what Fastly’s revenue warning might mean in general.
Fastly itself put the revenue guide down on TikTok (its biggest customer) not consuming as much of the service as expected, as well as headwinds at other customers which Fastly attributed to cost containment. I think there’s more to it than that, because there’s an obvious reason for there to be more to it.
The Obvious Reason
What did the late Q1 2020 and Q2 2020 coronavirus lockdowns create? They created a very strong “stay at home” movement. This movement benefited eCommerce greatly. It also benefited social network usage. And gaming. And lots of other online activities (even online stock trading).
Many of these activities which benefited from people staying at home were natural CDN users. TikTok was one such user, but so were many others. Hence, Fastly benefited greatly from this increased online usage.
Come Q3 2020, though, the lockdowns have in large part subsided. Things are not back to normal yet, but at least part of the large benefits seen in Q2 2020 are now gone. And as things normalize further, this will only become more evident. Online gaming will lose growth. Social networks will lose engagement. Even eCommerce will give back a large chunk of its gains, over time. There are no surprises here.
Hence, seeing a CDN suddenly disappoint in terms of growth is not really a surprise. But there’s more…
Not only should we see flagging growth at Fastly, but we should also see it across all activities which benefited greatly from coronavirus.
That’s not to say that affected activities will necessarily be negatively impacted. For instance, Facebook (NASDAQ:FB) and related properties will likely see reduced engagement. But, at the same time, advertising rates will recover because of two effects:
- Less supply (as everybody gets less engagement, fewer eyeballs).
- And more demand (as offline businesses start advertising again).
Hence, for companies like Facebook, the net effect might not be negative/might even be positive.
However, for providers of infrastructure who are paid on usage, the effect should indeed be negative. Not just for Fastly, but for other CDNs, and maybe even for cloud providers. For cloud providers, there’s just the doubt on whether reduced online usage will be compensated by more cloud usage by offline businesses. The same will apply to many suppliers which provide cloud services based on (end user) usage.
We should see this effect across many businesses. Although we’ve seen a fantastic tech bubble built on top of the “stay at home” phenomenon, people seem to have forgotten that this phenomenon is purely temporary and tied to a pandemic.
For sure, the pandemic might last more than expected. Maybe it affects lots of businesses for 2 years instead of just months. So, what? The “stay at home” tech stocks which rallied on this temporary effect often trade for 100s or 1,000s of times earnings, when they have earnings. They don’t trade for the 2 years of extra earnings that the pandemic brought, plus a reasonable multiple on “cruise” earnings.
What ails Fastly will also ail other tech businesses which benefited greatly from the coronavirus “stay at home” phenomenon. Slowly, things are going back to normal. Q2 2020 was the peak of “not normal”, so all future comparisons will tend to show some deterioration from the extraordinary numbers attained during Q2 2020.
The same effects should, sooner or later, hit most of the sectors which thus benefited extremely from having people stuck at home. When people are roaming around or working outside home, they don’t have nearly as much time to spend online. It’s as simple as that. And the more time passes, the more people will be roaming around until we’re back to normal.
In the meantime, I should also say it makes no sense to bid Fastly here, at $94, a place where the stock was at just days ago, when Fastly already said that its business is deteriorating.
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