A Twilio Tale
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Outline: |
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Intro |
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Twilio (TWLO) was one of the pandemic darlings with stocks like Zoom and Peloton. From March 20, 2020 to Feb 12, 2021, it gained more than 400% and at one point was above $430/share. Since then, it has been a tough journey for the stock, as the economy has reopened and pandemic darlings have gotten crushed. With an uncertain macroclimate, rising inflation and interest rates, and tech bloodbath, will TWLO be able to bounce back? |
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Cathie Wood certainly thinks so. It was and remains a large position for ARK funds and she has been buying more shares with the price tanking as much as it has over the past year. (-50% YTD and -70% since the Feb 12, 2021 high, as of 4/18/22) |
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What is Twilio? |
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TWLO was founded in 2008 and is still run by its founder, Jeff Lawson. It describes itself as a leading customer engagement platform. Its customers can use TWLO to program communications via text message, chat, email, and more. |
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If that wasn't clear, TWLO is what makes online customer service chat boxes possible. The pandemic accelerated demand for TWLO's services due to the big push towards digital transactions (97% of companies said their digital communications strategy has been pulled forward by 6 years). |
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TWLO’s communications solution for companies is similar to Stripe’s solution (API) for payments. |
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Before Twilio's APIs, messaging, voice, and video used to cost millions to integrate and take years. Now it's simply integrating a few lines of code, and everything works. |
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When the developers at Twilio’s clients build these communications features into the business software, Twilio charges fees based on how much those communications features were actually used. |
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For example, if one of Twilio’s clients built in a text messaging feature, Twilio collects fees based on how many text messages were sent. |
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TWLO generates 72% of revenues from usage-based fees and the rest comes from subscription fees. Below are some popular products: |
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Twilio serves 36% of the Global 2000, spanning multiple industries and different business sizes. In FY2021, Twilio ended with more than 500 consulting partners, a 119% increase YoY. |
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TWLO’s list of customers is more than impressive: |
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What is the Bull Case for TWLO? |
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1) High switching costs |
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Twilio provides the communications infrastructure and software for developers to integrate into their apps or websites. Once customers use Twilio's solutions, they are hooked into it for the long run as switching providers or building an in-house platform would mean a radical change in the communications infrastructure of the business. |
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Staying on Twilio's platform increases the likelihood for companies to use and spend more on Twilio's products. CEO Jeff Lawson says, Twilio adopts a land-and-expand strategy or "in and up" strategy. As companies embed more of Twilio's products, both platform stickiness and switching costs increase exponentially. |
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2) Market leader CPaaS (Communications Platform as a Service) and CDP (Customer Data Platform) markets |
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Twilio noted that its total addressable market (TAM) is about $62 billion and the acquisition of Segment (a customer data platform it acquired in Nov '20 for $3.2 billion) boosted this TAM to $79 billion as it expands to the customer data platform segment. |
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In Twilio's FY2021 Q4 prepared remarks, CEO Jeff Lawson identified three key trends for the company: digital transformation, the growth of the DTC model, and changes in data privacy policies. |
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According to IDC, Twilio is the market leader in the CPaaS space. As shown below, Twilio is miles away from its competitors. |
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IDC also recognizes Segment as the market leader in the Customer Data Platform market, with an 8.6% market share. |
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Not only is Twilio the market leader in the CPaaS category, but it also continues to eat away market share. According to Synergy Research Group, Twilio had a global market share of 32% in Q3 of FY2019. Today Twilio dominates the space with a 38% market share. |
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3) Strong organic growth rates |
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TWLO closed out 2021 with solid 54% revenue growth. |
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Investors should focus more on organic revenue growth due to the company's acquisitive track record. Organic revenue growth came in at 34% in the latest quarter. Growth in revenue per share was very similar at around 36%. |
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TWLO has given guidance for 30% organic annual revenue growth through 2024. |
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Valuation and Wall St Sentiment |
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As tech stocks keep getting crushed in a brutal 2022, TWLO seems to be trading at attractive multiples for what is likely to be a stock that can continue growing for many years. |
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TWLO stock price is down 70% from its all-time highs. On an EV/NTM sales basis, TWLO is trading close to its historical lows at 5.2x. Its multiple is also lower than the March 2020 lows (5.9x), despite being a much bigger and stronger business today. |
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From May '20 to Oct '21 EV/NTM sales had never fallen below 15x. |
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The selloff and subsequent historically low multiples may have provided investors with a compelling buying opportunity. |
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Wall Street analysts are bullish on the stock as well (tho we gotta take the overly optimistic sell-side research with a grain of salt) with an average price target of $328 (149% premium to price today - 4/18/22). |
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Wall St Analyst Ratings |
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Average Wall St Analyst Price Target vs Actual Price |
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Risks |
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1) Unprofitability |
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Twilio is still unprofitable on a GAAP basis. Even by Non-GAAP measures, Twilio is still struggling to find consistent profitability. Twilio is investing aggressively for future growth but if profitability metrics worsen amidst a rising interest rate and inflation environment, the stock may be punished in the short term. |
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2) Acquisition and slowdown in organic growth |
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Growth could decelerate rapidly, as has been seen at other pandemic winners. TWLO has affirmed long-term organic revenue growth guidance, but that guidance can always be withdrawn. |
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Twilio's acquisition spree could backfire due to cultural conflicts, shareholder dilution, and less favorable cost and revenue synergies. Twilio's slowdown in organic revenue growth may also be the reason why management is seeking external opportunities. |
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3) Customers build their own solution |
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Another risk is if its customers decide to build a solution in-house. Uber was their largest customer in 2017 and the stock took a hit when UBER announced that it would be building an in-house solution. |
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Since then, there haven't been any other similar issues, and as TWLO continues to develop new features and grow more entrenched in its customer's ecosystems, the threat of in-sourcing becomes less and less likely. |
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Conclusion |
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Twilio is the leading CPaaS provider, serving a diverse set of customers including some of the most disruptive companies today. |
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The company is growing rapidly and it is capturing more market share day by day, slowly building a cloud communications monopoly. |
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Unprofitability is a concern but the company is investing heavily for future growth. Twilio has high switching costs, technology, and network effect moats that will sustain its position as the market leader. |
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Given Twilio's high-quality business model, long growth runway, competitive advantages, and current historically low multiples, it's not hard to see why Cathie Wood has been buying up shares and why our second interviewer also has TWLO as his top pick. |
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Sources: |
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