Fastly (FSLY -1.14%) has been on a roller coaster ride this year. After gaining more than 500%, the stock tumbled more than 50% on fears that the loss of its biggest customer -- TikTok parent ByteDance -- would be devastating for the company. However, management provided details on the conference call that painted a very different picture.
In this Earnings Review from Fool Live on Oct. 30, Fool.com contributors Danny Vena, Daniel Sparks, and Jason Hall discuss the critical information that Fastly shareholders shouldn't overlook and why the news isn't as bad as some would have you believe.
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Jason Hall: Danny, you want to talk to us about what's going on with Fastly? Are you muted?
Danny Vena: It would help if I got myself unmuted, wouldn't it?
Jason Hall: There you are, welcome back.
Danny Vena: Here I am. Fastly, there weren't really a lot of surprises when Fastly reported their earnings a couple of days ago. For those who have been following the drama back about 2.5 weeks ago, Fastly released preliminary earnings results in connection with its acquisition of Signal Sciences. When that came out, there were actually a couple of the things.
First, was said that the usage based revenue from its previously disclosed largest customer, which we all know is TikTok parent ByteDance, had decreased. The other thing that they said was that some of their other customers had had a decrease in usage late in the quarter. Those two things combined led them to revise their preliminary estimates. They lowered them by about 5% from what they had previously disclosed.
The thing that has gotten investors really spooked over the last couple of months is what's going on with TikTok. The short version is that the Trump administration had essentially declared war on TikTok. They cited national security concerns and concerns with users' personal data on the platform and said that they were going to ban TikTok use in the United States.
Jason Hall: That's because ByteDance is a Chinese company, and TikTok is a Chinese product. There's just always been concerns about security and privacy when it comes to China. The worries were the Chinese government being able to show up at ByteDance's corporate offices and say, handover all your data, and per Chinese law, they would have to do it. ByteDance has always said TikTok's user data doesn't reside in China, it's in the countries that those users are in. Go ahead, Danny.
Danny Vena: Right. As a result of that, once the Trump Administration had announced its intent to ban TikTok, the company was put up for sale. There's a tentative agreement that the US operations of TikTok would be bought by Oracle (ORCL -1.73%) and Walmart (WMT 0.15%). That's currently on hold right now, investors are unsure whether or not the Chinese government is going to interfere in that. With all that uncertainty about what's happening, investors have really been down on Fastly.
I'm going to share my screen here for just a minute so I can share Fastly's shareholder letter here, and particularly this part right here where it talks about, existing customer timing. They talked about new traffic coming online, which is something that I...
Jason Hall: Hey Danny, if you wouldn't mind, you mind zooming in on that, it's a little small.
Danny Vena: Sure. Absolutely.
Jason Hall: One more, there you go. Perfect. Thank you.
Danny Vena: There we go. That might help me even find the part that I was looking for.
Jason Hall: (laughs) I wasn't going to make that comment.
Danny Vena: I had this highlighted earlier. But essentially what they said was with their largest customer had removed most of the traffic from both the United States and international market. Essentially, we're talking about that TikTok was backing off of its use of Fastly until it got more certainty on whether or not it was going to be banned.
It's important to remember first of all, that in the last quarter, TikTok only represented about actually 11% of Fastly's traffic. Secondly, the other thing that management said that's important is that it's going to be able to back-fill a lot of that traffic from other users, from other customers. So it's not like that 12% of revenue is going to evaporate. But that's essentially how investors are treating this news.
So I will say, I put out an article a couple of days ago. I doubled down on my position in Fastly because I think this now 60% drop in the company's stock price is really just an overreaction on the part of investors. I put my money where my mouth is, and I think that this will turn around in the quarters and years to come.
Jason Hall: I think it's a kind of thing we're assuming the Fastly thesis plays out. If we look out five years or 10 years down the road, nobody is going to really remember except us stock jockeys that love talking about this kind of stuff. Nobody is going to ever remember that ByteDance was at one point well over 10% of its revenue. It's not going to matter. Their business is going to continue to grow in so many other ways from so many other customers. It's going to become irrelevant, I think that's a big takeaway for me.
Daniel Sparks: It's good time to remember the overall thesis here is just that more and more applications are going to be built and used on the edge. We're just at the beginning of this, and Fastly is positioned dead center in the middle of this trend. So I can imagine exactly like you said, Jason, that this is going to be a very small blip five years from now.
Jason Hall: I think so, and if the thesis doesn't play out, it's not going to be because the relationship with TikTok weakened or went away. It's because something better just came along or Fastly didn't seize the opportunity in the way that we're anticipating it will.