Software Stack Investing

In this podcast, I will discuss indicators that are the catalysts for changing my position. I had owned FSLY during its COVID driven surge in 2020, enjoying price appreciation from the $20 range in May 2020 to break $100 by August. After some disappointing earnings reports later in 2020, I began reducing my position in increments around $80-$90 and closed it in early 2021. The stock continued to underperform in 2021, dropping below $10 in 2022. While software infrastructure stocks in general have lagged in 2022 due to macro effects, FSLY began its slide in 2021. Yet, peers were hitting all-time highs.

GA Week kicked off with the standard blog post introducing the themes for the week. This innovation week provided an opportunity for Cloudflare to close out on a number of product launches that have occurred over the last year, with some going back to the prior Birthday Week in 2021. The scope was enormous - Cloudflare brought over 20 products and enhancements to general availability over the course of the week. Many of these have a direct revenue component, or represent an add-on to an existing customer bundle.

At their Analyst Day in September, the leadership team set an ambitious growth target for $2B in revenue by FY2025. As we are halfway through Elastic's FY2023, this represents roughly a 2x increase in revenue within 2.5 years. When the leadership team presented the model for this target, they projected a revenue CAGR of 36% to reach it. That would represent an acceleration from the current growth rate in the low 30% range.

Confluent stock recently bounced off its 52 week low, yet still trades under the closing price from 2022. This is in spite of posting strong results in their Q3 report in early November, which drove an 11% after-hours pop. More broadly, Confluent is part of a basket of companies that provide enterprises with software infrastructure and services to power their digital experiences. Entering 2023, we see pressure on this basket, associated with concerns around the durability of growth. This effect, along with lingering headwinds from the path of interest rates and macro volatility, has ratcheted down expectations for the software infrastructure basket.

Cloudflare beat revenue projections for Q2 and raised estimates for the remainder of the year. More significantly, they demonstrated a renewed commitment to deliver positive free cash flow, reversing the backsliding in Q1's report.
This is the audio summary. For the full report check out SoftwareStackInvesting.com.