This weekend, the giant tech Oracle (ORCL) and the world’s largest retailer Walmart (WMT) announced a “tentative U.S. Government approval” for a deal with TikTok owner ByteDance (BDNCE), which should prevent TikTok from getting banned in the U.S. Here’s why Fastly (FSLY) shareholders should welcome that development.
The tentative approval should prevent TikTok from getting banned
Fastly improves the performance of its customers’ online services by hosting those services close to users thanks to its data centers located all around the world. In addition to those content delivery network (CDN) services, it also proposes edge computing capabilities, which allows dynamic applications to run close to the users.
During Fastly’s last earnings call, CEO Joshua Bixby revealed TikTok represented about 12% of the company’s revenue over the last six months, with less than half of that in the U.S.
But the agreement announced this weekend, which still needs to be approved, indicates TikTik won’t get banned. According to Oracle’s press release:
The President has announced that ByteDance has received tentative approval for an agreement with the U.S. Government to resolve the outstanding issues, which will now include Oracle and Walmart together investing to acquire 20% of the newly formed TikTok Global business.”
The agreement includes the following elements:
- TikTok Global will be an independent American company, headquartered in the U.S.
- TikTok Global will have an IPO (Initial Public Offering) in less than one year on a U.S. exchange.
- All American data will be moved to Oracle’s cloud data centers.
A positive development for Fastly
Let’s focus on what matters for Fastly.
Obviously, since TikTok would still operate in the U.S., Fastly is likely to keep generating significant revenue from its largest customer.
But hosting TikTok’s American data at a large U.S. cloud provider such as Oracle could represent a threat to Fastly’s CDN and edge computing businesses with TikTok over the medium term. Oracle could try to leverage its cloud infrastructure and replace Fastly.
But that’s not likely to happen for two reasons.
First, in contrast with the three major U.S. public clouds (Amazon’s (AMZN) AWS, Microsoft’s (MSFT) Azure, and Alphabet’s (GOOGL)(GOOG) Google Cloud), Oracle doesn’t propose a CDN solution that could compete with Fastly. And developing such capabilities would represent a multi-year effort.
In fact, Oracle already profits from Fastly’s growth as Fastly uses Oracle’s Dyn Traffic Director to locate its customers and route them to their closest server for better performance.
Second, Oracle and Walmart can together acquire only up to 20% of the new entity. Thus, by owning a minority stake instead of owning the whole company, Oracle won’t have the possibility to take operational decisions about TikTok’s computing infrastructure.
Thus, the risk of Oracle trying to take advantage of the agreement to profit from synergies to displace Fastly by providing TikTok with some CDN capabilities seems minimal in the medium term.
Beyond these distractions, Fastly shareholders should not pay too much attention to the impact of the TikTok deal over the long term.
Fastly proposes innovative solutions to accelerate the performance and the security of the internet, and management estimates that market at $35.4 billion.
Source: Investor presentation Q2 2020
Considering its revenue of $246.3 million during the last 12 months, up 45.5% year over year, the company remains exposed to significant growth opportunities. In addition, Fastly announced last month an agreement to acquire the cybersecurity specialist Signal Sciences, which should boost its growth.
Thus, one single customer isn’t likely to impact the CDN specialist’s financial performance over the long term.
However, Fastly stock trades at 33 times last-12-month revenue, which corresponds to strong growth expectations while profits have yet to materialize.
Thus, even if Oracle’s TikTok deal represents a positive development for Fastly, investors should remain prudent as the market is already pricing in quite a lot of growth over the next many years.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.