A Look at Fastly and Twilio Earnings | 7investing
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A Look at Fastly and Twilio Earnings

May 19, 2021

Earnings don’t always translate into stock market action. A company can report good numbers and see its shares fall or deliver bad ones and, for some reason, see a rise in its share price.

Both Fastly (NYSE: FSLY) and Twilio (NYSE: TWLO) recently reported and both companies have seen their share prices fall. Anirban Mahanti joined the May 17 “7investing Now” to examine the results from each company. He explained whether he’s buying or selling shares of both companies and provided some nuance about the two rising tech companies.

A full transcript follows the video.

 

Dan Kline: We are back once again with Anirban Mahanti. And you can tell by the fact that you can’t tell cuz I wear the same outfit every show. But you can tell with Anirban that we’ve done these all in one day cause he actually has different outfits, I have a very Fred Flintstone slash Zuckerberg approach, where I don’t want to have to think about clothes, if I could just have the row of printed animal dress that Fred Flintstone wears. And that was acceptable for every occasion. I’m not sure I can pull that one off Fred, Fred. Fred was a bulkier guy than I am. But uh, you know, if I could do the Zuckerberg thing and just wear the same exact thing in every scenario, I would do that. But in your case, different sweaters, different outfits.

But we’re going to talk about Twilio and Fastly earnings. Let’s start with Twilio. This is one where what the stock is doing is not necessarily connected to where the earnings came in. Is that fair to say?

Anirban Mahanti:  I think so. Well, though, you know, the same argument that you just made before that, you know, maybe the stocks were had pulled ahead, apply. Like Twilio is a fantastic business, a communications as a service platform company, they have these tools that allow other companies to digitally connect with customers that’s very powerful and doing a few other things in the call center, you know, to help with telehealth and so on that, you know, with the video calling feature, still, I think, make it a very, very interesting company.

This is not a small company, right? So in the first quarter of 2021, it reported just $10 million less than $600 million. Right? So (approximately) $600 million of sales up 60%, 62% to be accurate. Right? This is growth at scale, right? If you just take 600 times 4, that’s like $2.4 billion run rate growing at 60%. That’s phenomenal. Right? So it’s phenomenal, just just phenomenal. If you think about the skill,

Dan Kline: They’re being caught up in general negative market sentiment for this space, are they also being caught up in this ridiculous argument of, well, that’s 62%, this quarter, but they’re not going to have that next quarter?

Anirban Mahanti:  Well, you know, the next quarter guidance, the conservative guidance is very strong. They’re saying they’re going to earn about, let’s say, you know, call it $600 million next quarter again, which is gonna be about $10 million more than the previous quarter. And that’s going to be up somewhere around 47%, 48%, or 50%. They’re basically saying they’re still going to do to repeat that performance again. Remember, these companies all enjoyed a pandemic bump as well. So they actually had acceleration into pandemic pandemic, if you think about the US coming out of the pandemic, large parts of work coming out of the pandemic, still think explosion.

So I think this is this digital acceleration is on. And they’re really good at selling the, you know, more to their customers, right. So they have a usage based model, which means as people use more of it, they’re going to, you know, see more billings to it. The dollar based retention rate, which basically measures how much money they’re making from the customers they had (from) a year ago, that are still there this year, in looking at how much they’re spending this year versus last year, they spent 30% more, right, so dollar based retention was 33% more, 133%. That means the platform is sticky, and super viable. And this is a great growth story, right? So

Dan Kline:  Sticky is good at a platform unless it’s a restaurant, that that was always one of my problems. My problems, IHOP, you cannot go into an IHOP and not have every service be sticky, which is just not what you’re looking for. And I’m being a little silly here. But let me let me wrap up with Twilio. Twilio is a prime example of a company where it looks like everything’s going right. So the fact that its stock is trending down, probably means it’s a buying opportunity. Is that a reasonable read on this?

Anirban Mahanti: So here’s the thing like I personally own Twilio, I have not sold anything. I haven’t added anything materially to my  position because it has gotten really large. So I think if you can, if you can be patient that $2.5 billion run rate at 60 percent even if this thing grows or 30%, I think what people keep forgetting, just doing some mental maths out, let’s assume the 30% growth is there. 30% growth means you’re doubling every three years, roughly. But let’s go 35%, then you’re actually growing every two years, roughly, at 35%, you’re doubling every two years this, you know, in next two years, it could be a $5 billion run rate, and then another two years, it could be another three years, it could be a $10 billion run rate.

That’s a huge company growing at a pretty phenomenal pace, if it continues, right. And it’s very odd to expect a company growing at 60%, all of a sudden slows down to 20%. That doesn’t generally happen. Right. And you see that in software, a lot of software companies, Salesforce, we have talked about before, has been growing at 20% plus, at $25 billion run rate. There’s a huge opportunity here, this can be a much, much larger company. Again, my favorite is dollar-cost average into these companies, if you want to build up your position, great time to build up a position don’t have to go all in. If this is going to be a multi-bagger, it’s gonna be multi-bagger over time, right? So you have time. And I think that makes it just easier to buy. I just like to buy great companies over time.

Dan Kline: But just because a company’s price is down doesn’t mean it’s a good buy. You’re not as bullish on Fastly’s results

Anirban Mahanti:  Ah, yeah. So here’s I think, you know, so that the words that I used for Twilio growth at scale, I wish I could use the same for Fastly right, so Fastly’s problem I think is, so Fastly, is number at a high level actually does not look bad. It’s important, I think 35% earnings growth. But here’s the catch, it’s first-quarter revenue was only $85 million. So you grow your 35% at $85 million versus you’re growing at you know Twilio is $600 million and growing at 60%.

That’s like, that’s like completely different worlds, right? So Fastly doesn’t seem to be showing me growth at scale, which I really need to justify a high multiple and really justify because as we’ve talked about the sort of companies really bloom at scale. That’s number one. I think the issue I see it’s, it’s too quick a deceleration in my mind. The other thing I think that’s an issue with Fastly right now is if you look at actually organic growth, it’s 23-24% because they bought a company called Signal Sciences. And that’s now built into it.

So they’re growing at 20%. That’s actually a little worrying to me, there’s some execution issues I feel at Fastly, I personally hold the stock I haven’t sold it. Except, you know, I like to just leave companies good companies with an opportunity to run I think Fastly’s a good company its just having execution issues. dollar based attention number, though, was phenomenally strong, again, about 130%, which means that those customers that are using Fastly continue to love the product.

But there’s some issues with margin. And I think they’re having some trouble acquiring more customers. I don’t know whether it’s competition, or whether it just they don’t have a properly worked out, go to, you know, go to market model. All of those things matter. But I think I would like to see more observation.

I think there’s another nuance I would like to point out this is getting into nitty-gritty detail, but I’ll point this out anyways. So people could say that, you know, Fastly’s cheap, and it is, let’s say well, we look at the cash and balance sheet is like the billion dollars. The problem is, and you were talking about this, is that that billion dollars came from a convertible note that converts at around $100 a share price. Fastly’s share price right now is less than $50. Short interest is at 17% and I’ve seen the story and this sort of story happens you know this story plays around quite a bit. Another problem now for Fastly it’s also losing bleeding money because it’s you know, investing for growth and actually bleeding it doesn’t have free cash flow, it’s negative, free cash flow. If nothing changes, and it can’t get back its share price.

And that billion dollars that’s gonna convert to shares actually has returned back as billion dollars in cash. Where’s the cash gonna come from? And if it has to raise that cash by a debt that is not going to be probably at a good rate or does raise the cash via equity that equity dilution is gonna be significant. If there’s a different dilution that you know, it’s a dilution factor of two, 50 versus 100 right, i think a little bit of that is in play.

All of this could go away if Fastly could just get its go-to-market strategy to actually work right so if it can increase the pace of growth it can actually diversify its product which I think Signal Sciences allows it to do. Build more modules that they can then do you know upselling things could improve so I think Fastly’s cheap I’m continuing to hold the shares it’s not something that I’m looking to add personally like I would not you know, like what I’ll tell add to Twilio or some other company. I’m not going to add to or instead add to Simon’s April rec for example, I would not add to Fastly personally but I’m not selling. It’s a weird, you know, people say, you know, its either a buy or sell. For me, I’m a very slow seller. I just don’t sell very often. But that’s a personal situation for most people.

Dan Kline:  I think we’re all very slow sellers. I’m gonna ask one last question on Fastly. Do you think there’s a possibility that there is pent up demand here and there are companies because of the hit they’ve taken during the pandemic that are just waiting to pull the trigger? This is a it’s not an entirely necessary product. It’s a value add type of product. So could there just be like some crazy blowout quarter like three quarters from now when we’re not living in a pandemic?

Anirban Mahanti: I don’t think so. So I think this is going to be I don’t think this that’s gonna be the case, unless here’s the thing, right, so one of the things that’s hard that is the Tik Tok, which was a large contributor to the, to the revenue, and actually usage of their product moved away. And that was, you know, some kerfuffle going on between the White House and the Chinese and things like that. There’s a political, geopolitical tension involved in that mix. But put that aside, I mean, basically Tik Tok migrated away from that platform.

And they haven’t been, so yes, it is always possible that they go to market strategy lands with one huge customer, which all of a sudden, because they are a usage-based platform, you get this one huge customer and then all of a sudden, your usage goes up, and then your revenue boom, goes up, I have a feeling this is going to be a little bit, what I would love to see is that acceleration and growth, so their organic growth went from 23% to 35%, and then to 40%. And then it can maintain that 40% rate, I would be very happy. And I think the market would start rewarding them for that. The market right now feels that this company is actually kind of lost its way. And there’s a lot of talk about you know, these things that they’re going to do that it’s probably not happening. So the market is saying, show me the money. Or Show me what you can do.

Dan Kline: Anirban Mahanti how do we follow you on Tik Tok, no you’re not on Tik Tok. None of us in fact are on Tik Tok. Thank you for doing this. We will do it again soon. I would say you’ve earned a beer but it’s like seven in the morning. So we would probably frowned upon. You can have a mimosa you can you know, I’m gonna have a NasDaiquiri later, a drink I’ve made up in honor of the NASDAQ, which is not a real drink. We will see you soon.