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Fastly's struggles surrounding TikTok is a 'short-term setback': Analyst

Rishi Jaluria, D.A. Davidson Analyst joins the On the Move panel to discuss Fastly’s stock plunge.

Video Transcript

JULIE HYMAN: Shares of Fastly are down by about 25% today. This is a company that speeds content delivery over the internet and late yesterday slashed its revenue forecasts, saying that there was demand that was falling from its largest client. Its largest client is ByteDance, the owner of TikTok. To talk more about this right now, we want to bring in Rishi Jaluria. He is an analyst a DA Davidson who covers Fastly.

What gives here, Rishi, because the company has said that most of its revenue from TikTok comes from outside the US? And the ban got overturned here. So what's going on?

RISHI JALURIA: Yeah, and thank you so much for having me. I think a lot of us are left scratching our heads about what exactly is going on because we exited Q3 with no ban of TikTok in any major market outside of India, right? And yes, India is a huge market, but that was known at the time that Fastly provided guidance. And, you know, they use the phrase that it's in response to geopolitical, but given that, you know, there isn't any indication that TikTok growth has slowed down and it hasn't been banned in the US or Canada or the UK, I don't quite understand what is going on there.

And so I think we're all waiting more color, and I that also explains some of the reaction on the stock today, right? I mean, they missed by $4 million, and the stock is down so much. But I think it's because there's a lot of uncertainty around what exactly is going on behind the scenes that led to this.

DAN HOWLEY: Rishi, I guess, you know, real quick, can you kind of give us an idea of what Fastly really does? I know they speed up the internet connections for apps like TikTok or Vimeo, but, you know, what are they really doing? And I guess, you know, like you said, does this have more to do with the uncertainty going forward? And if so, why would they already have missed on some of their revenue targets without a ban in place?

RISHI JALURIA: Yeah, so at a high level, right, you hit it on the head, right? It lets websites and video and anything streaming-- it lets that come to us faster. And they do that by having these really dense points of presence with a lot of servers that enable that content to be delivered faster to the end user and that they have their own layer of software on top of that to really optimize performance.

So you can imagine for TikTok, right, having less buffer time, faster delivery is really, really important for the TikTok user experience. You know, again, in terms of, you know, what happened with TikTok-- and by the way, it wasn't all TikTok. There was some level of shortfall with other customers, and I think part of that might just be a function of, hey, maybe, you know, there's pandemic fatigue setting in. Maybe the reopenings in society and reopenings of schools and universities is also contributing to that. So I think there's a lot of factors, and really I think there's just so much uncertainty out there about what is kind of causing that for a company that was, you know, widely perceived to be a big beneficiary of both stay-at-home and work-from-home.

- And, Rishi, to put a specific number on this, we're referring to, of course, CEO Josh Bixby back in August saying that TikTok does represent about 12% of Fastly's revenue in the first half of the year. When you look at the other clients like Stripe, the New York Times, Dan mentioned Vimeo, BuzzFeed, the roster is quite large, right? And I imagine that it will continue to grow. It seems like you're still bullish and optimistic on the future of Fastly regardless of where TikTok goes, right? How do you anticipate perhaps it coming back down to earthly levels, and would that actually valuate the company on a more kind of pragmatic scale?

RISHI JALURIA: Yeah, absolutely, and I'm glad you brought that up. A lot of Fastly's, you know, flagship customers are ones like Shopify and Slack and Stripe and GitHub, right? Really kind of bleeding-edge technology companies that rely on Fastly. I think you hit on that, right, like this is to me a short-term setback. This happens a lot of times in software where you have customer concentration issues.

You know, I would bring back to the example of Twilio and Uber a couple of years ago, and then look at what Twilio stock has done since then. I think long term-- look, I think Fastly is a great company. I have a tremendous respect and admiration for Joshua. And at the same time, they're really growing their differentiation and growing their opportunity, both in edge computing and security, and I think that's a lot for me to get excited about. And so that's why I remain bullish on this in spite of the kind of short-term headwinds we're seeing from TikTok.

JULIE HYMAN: Rishi, you just mentioned Twilio. That's another stock that is up a lot this year, as you alluded to-- more than 200%, about 225%. Another stock that you cover, DocuSign, is up more than 200%, and even with the setback today Fastly is still up about 300%, more than 300%. Does what happened to Fastly also illustrate this sort of priced-to-perfection vulnerability in many of these stocks? Is it something that investors need to sort of guard against?

RISHI JALURIA: Yeah, absolutely. I think if you look through the pandemic, especially in software land, the momentum trade has been what's working out, right? Companies that have done well continue to do well, and nowhere is I think that more clear than Zoom. And I think it does take, you know, the next quarter for a Zoom or a DocuSign or a Twilio-- has to be a very, very strong quarter for the stock to work. Even I think I would argue meeting expectations next quarter may not be enough for those stocks to continue working because they are priced for perfection and more. And so I think investors have to be really guarded about what is baked into the stock price and what is realistic to expect out of these companies.