Sunday, September 12, 2021

Fastly (FSLY) versus Cloudflare (NET): Which stock is better on cash flow (operations) metric?

As noted before, I like to look at cash flow from operations, since it is one metric that tells me how good is a company at generating cash/revenue from its day to day operations. This money can be reinvested into the company for organic growth, acquisitions, research etc. Other mechanisms to raise cash are from investing activities and from financial endeavors. This has been nicely outlined in the article I did on Palantir, and would recommend giving it a read, if not already done so

I own Cloudflare (NET) stock but Fastly (FSLY) is a competition that has recently lost much of it value and is down considerably. In fact, at the time of this note, FSLY was down 40% and NET was up 280%, over a span of 1 year.  In order to see if the market had mispriced FSLY and if it could be considered a buy, I analyzed the CFO metric between the 2 companies. Perhaps, this will be a clue, to answer why one company has tanked while other has done so well. Moreover, it will allow us to examine if there may be opportunities to buy either of the companies. This is shown in figure below.

Figure 1: Comparison of Cloudflare and Fastly, operational cash flow, stock price and expenses

On balance cash flow from operations compared to stock price at time of earnings for NET (panel A, top left) compared to FSLY (Panel D, bottom left). The stock price shows overall congruence for both stocks. 

Cloudflare: Next, I would like you to focus on the earnings report quarter ending 12/31/2020, look at the on balance net cash from operations compared to reported sales and marketing expense (panel B), and reported research and development expense (panel C). There was a drop in the cash flow from operations (solid blue arrow)  which piqued my interest and then I want to see why – as you can see this drop actually corresponds to a rise in expense for S&M and R&D. So this likely is not reduction in cash flow from problems in company operations but likely allocation of cash to good use. Hence this drop is “reassuring”. The market likely responded to this report in a positive manner and hence the price went up (hollow blue arrow – panel A).  This is shown below which is the same figure as 1 but panels are expanded for detail (below)

Figure 2: Cloudflare
Fastly: Now in contrast, lets focus on the earnings report quarter ending 3/31/2021 for FSLY (bottom row), look at the on balance net cash from operations compared to reported sales and marketing expense (panel E), and reported research and development expense (panel F). There was a drop in the cash flow from operations (solid red arrow)  which piqued my interest as well and then again I want to see why – as you can see this drop actually does NOT correspond to a rise in expense for S&M (you can see that S&M expense 'gold diamond shape' is actually flat) and R&D there was an increase in spend but not commensurate with the drop in operational cash flow. I take this reduction in cash flow as problematic, a possible reflection of issues with company operations and this drop is “concerning”.  This was the opportunity to get out, sell the stock (red hollow arrow). This is shown below which is the same figure as 1 but panels are expanded for detail (below)

Figure 3: Fastly

In conclusion, NET has a stronger cash flow sheet and this is reflection of excellent operations, high efficiency and robust execution. If FSLY is able to improve on the on balance cash flow over the next few quarters, then I would be a potential buy opportunity but for now, Cloudflare looks more attractive. Hopefully, this helps readers to assess companies for themselves. If you have any comments or would like help refine this method, please message me on twitter (handle in figure).

Disclaimer: I own shares of Cloudflare (NET). The analysis if for my personal understanding of companies I invest in, but am sharing it for other in case, someone else finds it useful. This is not investing advice. All data were obtained from public sources.