today we're going to be talking about
fastly a company whose share price has
grown an incredible 306
in 2020 alone what is up everybody my
name is ben
i'm a former jpmorgan investment banking
analyst and welcome to rare liquid the
best channel for tech investing
so this is the first video in a series
i'm starting called rare deep dives of
tech companies
and it's going to be a playlist on my
youtube channel in this series i'm going
to be going really deep into talking
about what a company does rather than
talking about things like share price or
where i think a stock's going
or latest quarterly financial reports
because those things change so
frequently and so
these videos will be kind of evergreen
content you can always kind of go back
to to understand what a company does
i'm also starting this series because
knowing what a company does is by far in
my opinion the most important thing that
you need to know when you're investing
in a company and so this series is
really dedicated to
helping educate not only you but myself
on
more companies as they do all this
research to understand what these
companies do
alright so with that said let's get
started before i get
into fastly i first need to set the
stage by defining two terms
cdns and edge computing cdns are defined
as a group of servers that help deliver
internet content so
even this video you're watching right
now is delivered to you through a cdn
to put it really simply all else being
equal a really good cdn will let
something like a web page load really
really quickly
while a bad cdn will cause noticeable
lag
and the end user will be probably pretty
unhappy with the result
now edge computing is a field that was
kind of born
out of cdns and it's a field in which
fastly is one of the primary innovators
now for the average person it may seem
like data can be transmitted
instantaneously worldwide no matter
where you are
but in actuality the further a user is
away from the server
the more time it takes for data to
travel to compute
and be stored edge computing brings
computation and data storage
as close to the user as possible through
small distributed data centers placed
all over the world
this also allows for a lot of the data
processing to happen on edge devices
which are like smartphones
to really hammer this home imagine if
you had to travel all the way to texas
every time you needed gas versus just
going to your most local gas station
that's pretty much the difference
between how data used to be processed
where they used to have to travel
all the way to quote unquote texas or a
few data centers that are placed in the
world
versus now with edge computing which
allows for data to be transmitted to
local
servers which are like the local gas
stations this is a space i'm pretty
interested in so later on i plan to make
some videos about the history of cdns
and edge computing and
fastly versus cloudflare which is one of
the main competitors so
be sure to be on the lookout for that
all right with that said let's talk
about the first company in this series
vastly let me first begin by kind of
telling the story of why the company
began in the first place
fastly was founded by arthur bergman in
2011
he was previously the cto at wikia and
as the story goes arter became
frustrated with the capabilities of cdns
around 2010.
arter believed that he could create a
better solution and thus found it fastly
and the company branded itself around
cdns
until about 2017 when references to cdns
were replaced
with moving computing to the edge what's
really important to know
is that from the very beginning fastly
had a really differentiated approach
that
questioned the status quo and resulted
in custom solutions that really gives
the company an edge
no pun intended i'll be going over
three of these key differentiators the
first is silverton which is
vastly customized distributed routing
agent in its beginnings the fastly team
first examined approaches to handling
networking traffic
into and out of their points of presence
or pops
which are a collection of devices that
store data that cdns can pull from to
quickly deliver content
instead of using standard off-the-shelf
equipment
fastly purchased arista switches that
allowed them to run their own software
aka silverton which gave fastly more
control over
traffic routing and thus leading to
better content delivery
this also saved the company hundreds of
thousands of dollars for each pop
deployed
but more importantly software can be
changed while hardware cannot
which means that over time silverton can
become better and a stronger competitive
advantage
the second differentiator was less but
more powerful
pops most legacy cdn companies like
akamai have invested into hundreds or
thousands of small pops across the world
and continue to tout this as a strength
but the problem with smaller pops
is that the amount of data that can be
stored is limited this means that if a
data request is sent to a small pop
that's full
the request will then have to travel all
the way back to an origin server
which could increase the time by a
factor of 10 times or more
legacy cdns built their architectures
based on the old internet backbone aka
dial-up
which required these smaller pops that
are nearly impossible to upgrade now
so fastly examined all of this and took
a different approach
if legacy pops are local convenience
stores in which you have to visit
multiple to buy all your groceries
Fastly's pops are Costco style
supermarkets where you can buy
everything at once
fastly's pops have much more storage
space which significantly reduces the
need for requests to go back to origin
servers
and in addition to all this fastly
utilize ssds to store cache
data which is much more expensive but
offer much faster retrieval times
and according to a 2015 blog post the
ssds fastly uses are orders of
magnitudes faster than standard hard
drives
the punch line here is just that fastly
created a super modern internet
architecture through powerful pops
that result in much faster average
content delivery times for their
customers
the third differentiator was developer
customization
Fastly's founder Arter was an engineer
himself and he was really frustrated by
the lack of control
with the cdns that he worked with and so
that's why from the very beginning
fastly's focus has always been to cater
to developers and engineers
while legacy providers require technical
support to roll out changes
fastly added programmability to content
control through Varnish which is an open
source web accelerator
varnish allows for powerful features
such as instant purge of content
reverse proxies and real-time data
monitoring and management
but perhaps more importantly varnish
allows developers to adjust caching
policies based on their unique needs
giving developers much more flexibility
and control
resulting in much happier customers now
it's okay if you don't fully understand
what all these technical terms mean
what i just really wanted to show you is
that for every single step of the way
since its early beginnings
Fastly really took a differentiated
approach in each step
and that's what it has allowed the
company to disrupt the legacy cdn
industry
the company continued to build on these
unique differentiators and that's a good
segue into the next section of the video
which is fastly's products
the four highlighted on the right are
related to fastly cdn products
which i won't cover too much since i
just talked a lot about how fastly
differentiated itself on that front
one thing that's important to note
though is that even with fastly's unique
positioning
the overall sentiment is that cdn is a
pretty commoditized industry
and so there's going to be a lot of
competition on pricing moving forward
fastly of course understands this and
that's why the company is investing a
lot into
its cloud compute technology and cloud
security
starting with edge compute technology in
november 2019
fastly announced the launch of the beta
testing for compute at edge
compute at edge is a platform that
allows developers to build applications
at the edge
rather than in centralized data centers
and this provides the benefits of better
security
performance and scalability in a
serverless compute environment
alright dude but what does that mean so
let's break this down and talk about why
this goes
way beyond a traditional cdn
traditionally
cloud-based applications centralize
logic in a data center that eventually
hops over to a user's device
regardless of where that user is
geographically located
the problem with this is that
computation costs money
and it becomes more expensive the
further out from the origin that you get
fastly's compute at edge solves this
problem by allowing developers to push
logic closer to the user's device
which both saves money and increases
speed
but of course this isn't as simple as it
sounds for this to work
the logic outside of the data center
must be fast
isolated compact and developer friendly
in response to these four problems
fastly just like in its early days
true to form took a very customized
approach
instead of using the common existing
solution which was the chromium v8
engine
to compile and run web assembly fastly
built Lucet which is faster
more secure efficient and supports more
coding languages
it's because of Lucet that fastly's
cold start times are 35 microseconds
which is at least 100 times faster than
other notable competitors
in the latest quarter 4 2020 earnings
call management highlighted that compute
at edge has seen
considerable progress naming multiple
use cases in the gaming
machine learning language and ad tech
industries
so with all this said fastly is clearly
a pioneer in the edge compute
space and compute at edge could be a
huge source of growth for the company
but it's important to note that other
competitors are likely going to copy
fastly's approach
and there are also no guarantees to how
big this market is going to become
because
it is such a new field as a result if
you're an investor in fastly
you really need to pay attention to the
compute at edge roadmap
and make sure to follow it each quarter
to see where it's going and how other
competitors are reacting
the second product i want to highlight
are fastly's security services
which is known as secure at edge in the
past
fastly security offerings were
comparable to its competitors
but in august 2020 the company really
bolstered its competitive position with
its acquisition of signal sciences to
give a little bit of background signal
sciences was founded by three former
etsy employees who were really
frustrated with the existing security
solutions that protected web apps
just like fastly these founders designed
a new web application firewall
or WAF that was both modern and
developer friendly
from these beginnings the team built a
WAF with three key advantages including
higher accuracy
increased automation and flexibility
since then
signal sciences became one of the
world's hottest startups and was
selected by Forbes in May 2020 as one of
the top 25
fastest growing startups likely to reach
a $1 billion
valuation Gartner compiled reviews from
customers of WAF products
and signal sciences was the most highly
rated amongst
all competition with a 4.9 out of 5
rating
you'll also notice that fastly is not on
the list at all
and that's because its security
offerings were not really strong at this
point
but through the combined company fastly
is offering what's known as secure at
edge
and is arguably a leader in the web app
security space
secure at edge will be built on top of the
compute
at edge platform which means that cloud
applications won't require a separate
security layer in front of them
which is a game changer and results in
lower costs and higher effectiveness
and perhaps more importantly what this
does is help
accelerate edge computing adoption which
again is the big bet
fastly is making on its future growth
the next thing i want to do
is highlight a few of the key important
metrics of the deal
signal sciences was acquired for 775
million dollars
of which 575 million was fastly stock
which is good because that means the
signal sciences team and our fastly
shareholders and are incentivized to
help the company succeed
signal sciences also adds about 42
additional enterprise customers to
fastly
which the company can now more easily
cross-sell other products to
the company generated annual recurring
revenue of 28 million dollars as of June
2020
and was growing at 62 percent versus
fastly which typically grows in the 30s
and 40s
gross margins are above 85 percent which
is much higher than fastlys which is
usually in the 50s
and lastly gross retention of 96 shows
the stickiness of
signal sciences product which is a great
sign to quickly recap
hopefully by now you see that fastly is
much more than a traditional cdn company
and through compute at edge and secure
at edge it's really building the next
edge computing platform next up let's
talk about the customers that give
fastly its revenue and some key revenue
related metrics
fastly focuses on large enterprise
customers
which the company defines as customers
who spend more than a hundred thousand
dollars annually
this is a primary distinguishing factor
from cloudflare
which is fastly's biggest competitor
pretty much and i'll be making a
separate video about cloudflare so be on
the lookout for that in the future
according to the latest quarter four
2020 earnings report
Fastly has a total number of customers
of 2084
of which 324 are enterprise customers
the metrics you see here are also the
key figures you want to be focused on
each quarter
and hopefully see an upward trajectory
if you're invested in the company
fastly's DBNER of 143%
which is really high means that if a
customer was spending 100
last year they spend 143 dollars today
DBNER excludes customer churn while the
net retention rate does take into
account customer churn and accounts for
customers lost
fast leads quarterly and last 12 months
NRRs
are very healthy at over 100 lastly
annual revenue retention rate sits at 99
meaning that fastly lost just one
percent of customers
if you're an investor or potential
investor in fastly
what i recommend is making sure to keep
track of these metrics each quarter
for example in the latest quarter
fastly's DBNER
and NRR slightly declined which is kind
of a
problem only because of fastly's
incredible high standards and
expectations that
it's already set for itself but this is
something that is a little bit worrisome
to investors currently
the last thing i want to mention is that
fastly gets all this revenue from some
of the most highly innovative digital
companies in the world
which really validates the company's
services next
let's talk about fastly's addressable
market and competitive positioning
highlighted in red are a lot of numbers
here but i just suggest you pause the
video to read through this because i
don't want to just read off a bunch of
numbers to you
what you mainly can take away though is
that fastly's products are in huge
markets worth billions of dollars that
are growing extremely quickly
by 20 to 30 percent a year fastly
markets itself well
as a company with a developer first
mentality which is a very modern
marketing approach
versus in the past where legacy CDN
companies used to target c-suite
executives
the three key strengths that fastly
touts are lower costs
more control and better security all
three of things that we covered earlier
on
in the video now i'm not gonna go into
fastly's competitors too much here
because i will be making a video in the
future
about fastly versus cloudflare but the
key competitor names in edge computing
that you should know
are amazon's lambda @ edge microsoft's
intelligent edge
akamai's intelligent edge platform and
cloudflare's
workers platform when looking at all
these competitors
fastly boasts the fastest cold start
time at 35 microseconds
which far beats out any of the legacy
competitors and its biggest competitor
cloudflare the last important thing that
i want to mention about fastly's
competitive positioning
is its management team i'm not gonna
spend time reading off all the bios so
again
feel free to pause the video as i speak
so you can read them
the key takeaway is just that fastly has
assembled a world-class team
both organically and through
acquisitions and this is one of those
intangible strengths
that's hard to measure but very
important for a company that's trying to
disrupt an industry
alright guys so that's all i have for
you today believe it or not i actually
left out a lot
and so if you want to dive even further
into the company
i'll leave a lot of links to the
resources i use
in the description below as i mentioned
i'm not going to talk about my opinion
on where i think the share price is
going for fastly
but if you do want some live updates i
do keep my patreon members updated
through private discord channels
of my buy sell alerts so if you're
interested make sure to check that out
in the description below
alright with that said i hope you guys
found this video helpful
as always thank you so much for tuning
in and i'll catch you next time peace
[Music]
you