Will “The Edge Eat The Cloud?” What’s being teased by IPO Insider?

Sniffing out a teaser pitch from RiskHedge's Justin Spittler

A reader sent me a question on a topic that interest me, and he referenced a teaser pitch from Justin Spittler for his IPO Insider ($2,997/yr), so that caught my interest…

His actual words were, “any chance of sleuthing these 2 edge computing companies?” … so that’s the goal today, but I’ll also try to go into some detail about these firms. Ready?

The email pitch from the RiskHedge folks is headlined, “America’s Most Critical Industry is Being Eaten Alive” … and while you think maybe he’s talking about real estate, since much of the intro is about how offices are now sitting empty, it’s really a pitch about “edge computing” is going to eat “cloud computing.”

That’s probably more of an evolution than a dramatic “Edge eats Cloud” statement implies, and most of the businesses you might imagine are tied in to both of these trends, but let’s dig into the opportunity he sees in these “work from home” days…

“I’m not referring to Zoom Video (ZM) or any other “work from home” stock you’ve probably read about. This opportunity is much bigger. In fact, early investors who recognize this shift stand to collect +1,000% in coming years….

“Twenty years ago, this would have been impossible. Companies didn’t have the tools to allow thousands of employees to work from home.

“We’re only able to do this today because of ‘the cloud.'”

And he goes through a long list of the big winners, talking up now the cloud has been the primary driver of success for so many companies for 15 years as enterprise software shifts to internet-based software and services, but he indicates that the big cloud gains are over, and we’re on the verge of that next big jump…

“The easy money in cloud computing has already been made…

“Amazon, Salesforce, and Microsoft (MSFT) already dominate the cloud computing market.

“So, if it’s 10X or 20X gains you’re after, I suggest focusing on the next evolution in computing.
I’m talking about ‘edge computing.'”

There’s a fair amount of exaggeration here in how important “the edge” is to all kinds of new innovations, but here’s how he puts it in the email:

“Edge computing makes the ‘impossible’ possible…

“Technologies like self-driving cars, IoT, AR, and the commercialization of 5G will never get off the ground without it.

“But you shouldn’t wait until these technologies go mainstream to invest in edge computing.

“Big money is already pouring into edge computing. According to the global research firm Analysys Mason, 30% of its IT budget over the next three years will be spent on edge cloud computing!….

“Other experts believe edge computing will end cloud computing as we know it. Peter Levine—partner at Andreessen Horowitz—thinks edge computing will ‘obviate cloud computing.’ The research firm Gartner Group shares a similar view. In 2017, it predicted that ‘the edge will eat the cloud.'”

And then we finally get to the tease our reader mentioned about two edge computing stocks…

“The opportunity is so big that I recently ‘doubled down’ on edge computing.

“I added a second edge computing stock in my advisory, IPO Insider.

“One of these companies has quietly built out one of the world’s largest edge computing networks. The other has partnered with Microsoft to help it build out its edge computing capabilities.”

Any other clues? Just this…

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“In fact, one of my edge stocks has raced 57% higher since I recommended it late last year. The other has spiked 67% since I added it to the portfolio just three weeks ago.”

So can we answer those questions? Not definitively, since those clues are a little sparse when it comes to offering 100% confirmation… but the very likely solutions for this teaser are the two most obvious recent IPOs in the “edge computing” space: Cloudflare (NET) and Fastly (FSLY).

Those clues don’t get us enough specific fuel for the Thinkolator, but it’s a fairly small sector when it comes to public companies… so here’s my guess: Spittler probably recommended Cloudflare in November or December, there are plenty of days on which you could have picked the stock at that time and be sitting on roughly a 57% gain today. And he probably recommended Fastly at the end of April or beginning of May — depending on the specific moment of recommendation, you would have had 67% gains on May 19 (when this email ad is dated) if you had bought on April 27 or thereabouts (or, really, anytime before May 7, when the stock shot up following its big earnings report).

Fastly went public about a year ago, and Cloudflare went public back in September of 2019. And while I’ve actually been a Cloudflare customer and have never used Fastly, I prefer FSLY by a small margin and have owned FSLY shares since January — mostly because the valuation is more compelling. Cloudflare is a bit over twice the size of FSLY, and is growing revenue a bit more quickly, which is presumably why investors have bid it up to 22X sales (FSLY’s valuation was appealing to me mostly because it was at “only” about 10X sales in January when I first bought the stock, but that has now bumped up to about 15X).

And Fastly has collaborated pretty closely with Microsoft to embed its Fastly edge cloud into Microsoft’s Azure cloud services. Cloudflare partners with Microsoft as well on many projects, as well, so that “clue” could really match either. And yes, either one could really claim to have built “one of the world’s largest edge computing networks” (and both do claim something similar to that, in not so many words).

These are essentially the next evolution of the content delivery network that was pioneered by Akamai more than 20 years ago — the basic idea of a content delivery network (CDN) is that it moves the big files closer to the end customer so they don’t have to travel as far when you’re downloading them… so if you’re downloading a popular movie or video game, for example, it’s far more efficient to download it from a server that’s colocated with a nearby network hub in your city (or even your neighborhood) than it is to have every single customer download that big file from one centralized location. Even with huge and fast data centers, and with fiber-optic connections from coast to coast, distance matters.

And over the past decade, CDNs have evolved to do more than just put static files closer to end customers, they’ve also distributed more complex work to these “edge” computers, with systems in the background that constantly make sure these systems at the edge are talking to each other and are all up to date, both to help with security (there’s no single server to “fail” for everyone, and no single server to “hack”) and to help the more complicated interactions move more smoothly now that we’re not just downloading files from the internet, we’re performing complex work that requires constant back and forth communication with “the cloud.”

So that’s basically the service that Fastly and Cloudflare perform — they operate networks of servers that are “on the edge” and closer to end customers, and they constantly balance the load and the security and the up-to-dateness of all those systems.

Those two companies aren’t the only ones solving this challenge, but in the big picture this is all clearly of growing importance as the internet is taxed in new ways, not just with more reliance on streaming video and video games for entertainment, and with data demand that will only increase as we rely more on mobile networks and 5G is rolled out, but with heavy reliance on distributed cloud systems for millions of workers who are in “work from home mode.”

And while “work from home” and “please God give me more Netflix” had a big burst of demand in March and April and might come down from those highs a bit as some parts of the world begin to “normalize,” those are also strong long-term trends that aren’t going away. Indeed, some of the coronavirus impact will likely be permanent in the way it changes both consumer behaviors and company policies — we’ve seen headlines for weeks about companies rethinking “work from home” as a permanent strategy, with Facebook talking about the likelihood that at least half of their workers will be remote a decade from now, and Shopify CEO Tobi Lutke announcing that “office centricity is over” as he closed their company offices for the rest of 2020 and noted that most employees will be allowed to work remotely after that. We’ll be going back to work, but not everybody will be going back to the office.

Cloudflare’s