TMTB EOD Wrap

Good afternoon. QQQs +27bps but another ugly day in most of Tech land outside of AI semis — the same story it’s been since the start of the year. Internet investors are getting a taste of what software investors have been dealing with for the past 6 month - no place to hide, not even the large caps. SHOP probably one of the ugliest reversals I’ve seen in a long time going from +10% to -15% at one point (finished -6%). Internet & Software are still struggling to adapt to what might be a new normal: a dizzying pace of AI acceleration this year which is threatening how everything in the digital world looks, functions, and is valued at. Everyday seems to bring a new “reason’ why price action is the way it is — was it Claude Cowork Windows release today? Or was it Seedance 2.0? Or the viral X post about how white collar work is doomed?

Our friend Citrini put it well today:

Into this software selloff, anything that wasn’t nailed down was thrown overboard. Vertical SaaS, digital advertising platforms, portions of fintech, all suddenly trading at discounts to their historical ranges as the market begins to assign what I’d call an “AI Disruption Discount”. Does your high switching cost or sticky UX matter in the AI era? Don’t know? Okay - trade lower until you do. Will agentic commerce threaten your marketplace? Maybe? Okay, well, you’re worth 30% less.

The logic is ruthless and correct: none of us really know what AI will look like in a few years, and the technology is advancing at a rate that has us asking if the singularity actually just got penciled in for next Thursday

It’s what I like to call the “Event Horizon Paradox:” As AI acceleration increases and brings us closer to “digital” AGI, the window of predictable and knowable future cash flow becomes increasingly uncertain. Software and internet investors are still in a bit of shock at how to make sense of this. A lot feeling like “will these sectors ever be investible again?” In that context, it’s not surprising we are seeing increasing vol and chaotic price action in the face of the freight train that has been ACCel this year. After all, the market isn’t just a mechanism for discounting fundamentals and perceived risk, but also a reflection of the current emotional state of participants who are doing that discounting. But as we’ve seen time and time again in the markets after big narrative/paradigm shocks (and AI is arguably one of if not the biggest for sw/internet): the market digests, recalibrates, reassigns risk premia. Then investors agents adapt and learn accordingly. Our sense is dispersion within sectors will start to increase as time goes on. Despite the NET fade, that and DDOG could be a sign that’s already starting. A good thing for L/S stock picking crowd.

It’s the middle of earnings, so we won’t keep belaboring a point you’ve likely heard in one form or the other over the past several weeks. We’ll save some more thoughts for the weekend. Let’s see what tomorrow brings.

For now, let’s get to the good stuff…

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Post-close earnings:

APP -7% looked solid with a Q4 beat and Q1 guided to 5-7% but fading a bit in the post. Commentary around e-comm a bit squishy as expected so far on the call.

Solid Q4 with revenue +3% vs Street and EBITDA +5% above, though the beat was more subdued than APP's typical ~5% revenue upside over the trailing 8 quarters. Q1 guide of $1.745-1.775b came in 4% above cons at the midpoint, implying 52% y/y revenue growth. Q1 EBITDA guide of $1.465-1.495b also 6% ahead at midpoint.

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FSLY +33%. Beat and raised across the board, highlighting AI as a growing tailwind. Record revenue, gross margin, and operating profit in Q4. Strong guide for FY with meaningful upside to Street on both lines.

Q4: $172.6m/$0.12 vs $161.4m/$0.06
Q1: $168-174m/$0.07-0.10 vs $159.6m/$0.01
FY: $700-720m/$0.23-0.29 vs $667.8m/$0.13