As the world started to go on lockdown a year ago, internet data traffic started to swell. Data traveling across the web has been steadily on the rise since the internet was first commercialized, but it was becoming increasingly clear that the internet's existing infrastructure was getting put to the test.
Edge computing (in which data and computing gets moved out of a centralized data center and located closer to the end-user at a smaller localized data center) companies Fastly (FSLY +9.46%) and Cloudlfare (NET +2.00%) were already on my radar after their 2019 IPOs, so I dumped my shares of legacy content delivery network (CDN) CenturyLink (now Lumen Technologies (LUMN 0.90%)) and started investing in edge computing. A year later, here's what I've learned.
Even if you have "high conviction," invest in a basket of stocks
Edge computing (and software-based network tools based on the concept, like Fastly and Cloudflare) are an emerging tech trend springing from the cloud movement. I was initially most optimistic about Fastly, and it did indeed outperform for the first few months after I made a buy. In fact, it ran up over 400% after I made my purchase, so I did something I usually don't and sold for a profit. I got lucky and was able to buy again some, 40% below all-time highs, last autumn during the company's TikTok debacle (more on that in a moment).
Image source: Getty Images.
Fastly was my "high-conviction" stock, but I know better than to bet it all on one name in an emergent industry. I thus also picked up Cloudflare (which has since caught up and then some as far as stock price appreciation goes, and is the larger company as measured by revenue), and later added legacy CDN Limelight Networks (LLNW +0.00%). I added Limelight because it had already picked up momentum in the autumn of 2019 when Disney+ launched, and was getting some benefit from other streaming services coming online. It is also working on building its own edge network, but has by far been the laggard among my three-stock basket since then.
Data by YCharts.
The experience has taught me that it's hard for business incumbents to transform their operations when new technology hits the market. There's still value in Limelight, and it could turn a corner and return to growth. But Fastly and Cloudflare have established themselves as the leaders in this space. Nevertheless, not knowing who will come out on top, I'll be sticking to my "multiple stock theme" approach in the future. Investors looking to bet on a new investment trend before there's a clear-cut leader should pick a few names, and add to the positions on a regular basis over time.
Perfection not required, but be willing to course correct
Diversifying my edge computing stocks certainly diluted my overall return. I would have been much better off picking just Fastly or Cloudflare. But hindsight is 20/20. If I had been really out of touch and concentrated my attention on just Limelight Networks, I'd be an unhappy camper right now. Instead, a blend of the three stocks has still yielded me a tidy triple-digit percentage return in the first year. I'm not going to complain about that.
However, time does afford the chance for some reflection, and opportunity to make slight corrections. Limelight has regressed and posted a year-over-year revenue decline in fourth quarter 2020. In this environment, where the internet is more important than ever, it's not a great story. Normally I'd be inclined to give the company another quarter or two to right the ship, but this might be an exception. I'll be looking to sell and reinvest the proceeds back into my two winners.
I'm again sticking to my guns here. Until an ultimate winner (or winners) emerges in an up-and-coming industry, holding a few names makes sense. But over time there will be laggards. When it becomes clear, sell the laggard(s) and reinvest into the winner(s).
Don't let short-term effects dissuade you from your long-term thesis
Back to my Fastly story. I got lucky and sold high and was able to buy again at a much lower price. It rarely works out so perfectly, though. Better to let a winner ride over the long-term until there's a long-term reason to exit. Put another way, I allowed short-term noise to affect my long-term outlook.
To illustrate, sporting events usually have a halftime show. A good performance from a favorite artist is a nice diversion, but if it's a dud, do you completely abandon watching the second half of the game? If it's the sporting event itself that you tuned in for, probably not. If anything, you take a break for a few minutes and come back once the game starts again.
I believe edge computing is a long-term growth trend. The cloud is an incredible technological development, but the internet was designed to be decentralized and distributed. Pulling data and computing out of centralized locations just makes sense, but it's going to take many years to develop. Fastly losing its largest customer (TikTok) was a dud halftime show, but there was still more game left. If you believe in a company's story and mission for the long term, don't let temporary events persuade you otherwise.
Same goes for how I feel about Cloudflare. The valuation is sky-high after its epic run last year and a stock price correction could be right around the corner. But this edge computing and next-gen web company is disrupting the status quo and growing at a rapid rate. At some point, there will be a distraction, but I originally bought with the intention of holding for the indefinite future. Until there's a long-term reason not to (like how Limelight has played out in the last year), I plan to hold and periodically invest more in my top edge computing network stocks.
