The Internet success story that no one knew about

On Tuesday 8th of June, the Internet went dark. Or at least, it did if you were reading the Guardian, Reddit, the New York Times, CNN, or the Financial Times. It also went dark if you were wanting to buy online from several major e-commerce sites — think Amazon and Shopify, for instance — or stream music from Spotify.

Personally, I didn’t notice the outage. It was quickly fixed, and websites were back online within an hour. Some sites didn’t even go dark, I gather: instead, they just slowed down.
 
The cause? A software bug in a systems update at a company called Fastly (NYSE: FSLY), which hosts web content for a truly staggering roster of some of the world’s biggest online businesses. Take a look at the customer case studies on Fastly’s website: a more impressive list of the brightest and best would be difficult to imagine.

News to me

Now, I’d never heard of Fastly before the outage occurred. Apparently, the company offers very high — and guaranteed — levels of ‘uptime’, and so might be on the hook compensation payments to customers, depending on the particular hoisting package that they are on.
 
So what do you think happened to Fastly’s share price, following the outage?
 
It went up, by 11%.
 
That’s right — instead of heading down, as one might imagine, Fastly’s shares spiked sharply upwards.

Why?  

Investor appeal

To me, the answer is fairly obvious. Coming to market in 2019, Fastly’s market capitalisation is now double what it was when it was floated. That’s quite some share price appreciation.
 
Customer retention levels are 99%, according to the company’s latest investor presentation, and revenues grew 45% last year. Average spend per enterprise-class customer is US$782,000 — up 46% from the level at first flotation.
 
And as I say, Fastly has hundreds of such customers, and is gaining more all the time. Check out the investor presentation for some very interesting charts.

Yet plenty of investors won’t have heard of the company, until the outage occurred.

When all of a sudden, it became obvious that here was a fast-growing business with an impressive blue-chip customer base.

Hiding in plain view

Now, Fastly isn’t (yet) profitable. And free cash flow is negative. But losses are slowing, and cash burn is reducing.

Even so, I won’t be buying Fastly’s shares — as an income investor, I prefer shares offering decent dividends.

But I can see the appeal. And evidently, so can others.

The real lesson here is the value of information. Fastly was hiding in plain view: the investor presentation I mentioned above, for instance, was published back in March.
 
There were no secrets. Everything was in the public domain — even all (or at least most) of the impressive names on Fastly’s customer roster.

And yet it obviously came as news to enough investors for the share price to spike as they bought in.

Knowledge has value

Think of it as information asymmetry. There’s value in knowing something — but often, the cost of not knowing something can be greater.

Put another way, the investors who bought into Fastly after the outage have paid a premium for doing so. As have all those who failed to buy in the months that followed Fastly’s flotation, when the share price was broadly flat, yet bought since.

In short, the smart money — and the well-informed money — got there first.

In investing, information is a competitive differentiator.