Fastly's guidance update: Twilio 2.0?

Update13 days ago
On Thursday, Fastly fell 27% after trimming its guidance for Q3 revenue by 5%. The drop brought the stock to levels it last saw two weeks ago.
The guidance reduction was largely attributable to lower than expected revenues from TikTok, currently Fastly's largest customer (representing ~12% of revenues, with the US business contributing to roughly half of that).
While some might scratch their heads at a seeing 27% pullback on a 5% guidance reduction, we would flag that this pullback follows the stock's steep ~40% rally over the past two weeks, so is arguably a natural re-basing of expectations after a run-up that can only be described as furious.
But more importantly, we don't see Fastly's long-term outlook as having materially changed following the guidance reduction, and view the current pullback as an attractive dislocation for long-term holders to increase their exposure.
Stepping back, the current setup in Fastly reminds us tremendously of Twilio back in early 2017, when the company experienced outsized volatility due to its elevated exposure to a large customer (Uber).
Twilio as you may know is one of Titan's best performing holdings to date, and like Fastly, is a developer-led software infrastructure business that prices its products based on customer usage (in other words: non-fixed pricing).
In May 2017, Twilio's stock plunged 26% after reducing its revenue forecast 2% below analyst expectations - a guidance cut and subsequent stock price reaction that nearly identically mimics Fastly's today.
Twilio after hours on May 2, 2017
The reason for that guidance cut? You guessed it: reduced spending by its largest customer, which at the time represented 12% of Twilio's revenues (incidentally the same exact exposure that Fastly has to TikTok today).
What happened following that 26% pullback is now history: Twilio's stock went on to 10x over the next three years as revenues swelled to an expected $1.6 billion this year.
Over that three year period, the value that Twilio added to its annual revenue base more than 100x'd the dollar value of the annual guidance cut that prompted its stock's overnight 26% haircut.
While Fastly's future is still untold, we think the company's outlook is remarkably similar to Twilio's in 2017 - not because of its trading dynamics, but because of the extremely attractive long-term growth opportunity it holds, propelled by a highly developer-centric approach to product development that was key in enabling a company of its size to count so many large technological leaders amongst its customers.
We believe Fastly and Twilio are classic case studies that point to a bigger nuance around customer concentration that often goes under-appreciated by investors.
For more on that, be sure to tune into tomorrow's Quick Thought.

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