Internet outage reveals a buying opportunity for stocks

For 49 minutes on Tuesday morning, there was no way to read the New York Times online. You cannot broadcast CNN or BBC. For 49 minutes — or about 3,000 seconds — you couldn’t even read about the latest memes stocks on Reddit.

The problem arose from an outage in a major Internet infrastructure company called


quickly
(Stock ticker: FSLY). High-traffic websites such as publishers, video streaming companies, and retailers rely on content delivery networks or CDNs to move Internet content closer to customers, enhancing performance and reliability. Publicly traded CDN operators include Fastly,


Akamai Techniques
(Brother),


Cloud Flare
(NET) and


Limelight Networks
(LLNW).

CDNs are very reliable, but for a moment last week, Fastly crashed. At 5:47 AM ET, the Fastly client made a change to its internet configuration, the kind of tweak that happens every day. But this time, the change caused an undetected error in the Fastly program. This in turn caused the accident. At 6:27 AM I quickly found out what had happened, and nine minutes later the network started to recover. The interruption lasted less than an hour, but the effect still persists.

The incident raises questions about Internet stability, cybersecurity vulnerabilities, and Fastly’s business. Some of these questions have already been answered: This was a bug, not a hack. But the event highlights a very important, but mysterious, part of the web – and one that investors may want to be exposed to a little bit.

Dan Rayburn, an analyst and CDN consultant who writes the Streaming Media blog, says there is good reason to be interested in this enigmatic work. “Without CDNs, the Internet would not exist,” he says. “It will not work.” Rayburn notes that a few large content companies –


NetflixAnd the

MicrosoftAnd the And the


the alphabet‘s
Google — operates its own content delivery networks. But almost every other site relies on Fastly and its competitors to reach readers, viewers, and shoppers.

While Rayburn notes that “the blackout is not good at all,” he notes that every CDN delivery network has experienced a blackout at some point. “This is the Internet,” he says. It consists of servers, storage, routers, software, electrical network, and human judgment. Periodically, servers crash, power goes out, software crashes, and people make mistakes.

(In other news, I spent over 49 minutes on the phone with HBO Max last week simply trying to log in via my Roku device to watch the latest episode of East Town mare.)

Somewhat surprisingly, Fastly’s stock is up about 10% on the day of the outage. why? Well, for one thing, act fast quickly to implement the fix. This was an example of strong crisis management. The outage also inadvertently highlighted the critical role Fastly plays for top-tier websites.

However, several Wall Street analysts warned that the blackout could have long-term repercussions for Fastly. As Rayburn notes, CDNs generally have agreements with their clients that stipulate certain service safeguards, with penalties for loopholes. A few analysts said the incident could prompt some Fastly customers to look for alternative CDN providers.

Always volatile, shares of Fastly are up 335% in 2020, as investors treat the stock as play from home, similar to


Zoom video communication
(ZM) and


Interactive Peloton
(PTON). But the stock is down 60% since last fall, as investors switched from high multiples and stay-at-home stocks to lower-priced reopening bets.

Other factors have pressured Fastly in the past year, including losing most of its business with video service TikTok, once its biggest customer.

In May, Fastly also announced the sudden departure of its longtime CFO. The stock stumbled on the news, which came with the March earnings report and the disappointing outlook for June that seemed to confuse analysts. Although the quarterly forecast missed estimates, it quickly raised its full-year guidance. CEO Joshua Bixby vaguely said on the company’s earnings conference call that “a lot of really important opportunities… are coming our way.”

For all these questions, the CDN sector still has a clear appeal. But investors have options, some of which are much cheaper than Fastly. Akamai is a big-cap bet, with returns nearly 10 times that of Fastly. Akamai has survived—it was one of the best performing IPOs in 1999. It trades at a relatively modest five times estimated sales for 2022. But after that, Akamai is growing more slowly than its smaller competitors.

It quickly remained a growth stock, with revenue expected to rise 30% this year. Its shares are expensive, trading at nearly 13 times estimated sales for next year, and the company has yet to turn a profit. However, Fastly’s stock could resume its rise if those opportunities mentioned by Bixby arise.

Among content delivery networks, Cloudflare was the best performer, focusing on security and smaller file sizes, rather than streaming video, but it holds a cloud-style rating of 36 times on forward sales.

Limelight is a micro-cap game, with a video focus, and a focused customer base; Amazon and


Sony
It accounts for nearly half of last year’s revenue. lurking in the background:


Amazon.com‘s
(AMZN) CloudFront, which Rayburn estimates revenue was $600 million last year, double Fastly’s revenue.

With Internet traffic congesting, the CDN market opportunity should continue to expand. What the outage showed last week was not the weakness of the internet, but its resilience.

write to Eric J. Savitz at eric.savitz@barrons.com