Twilio Inc. (TWLO, Financial) is a cloud communication platform used for building SMS, voice and messaging apps on an application program interface (API) for use worldwide.
In 2016, Twilio had one of the fieriest tech initial pulbic offerings after its stock price surged from the opening price of $15 to almost $70 within three months. That astonishing rally led to a swollen price-sales (P/S) ratio of more than 20 however. In the end, the company was up just 10% in the previous year. This steep decline was due to its agitated valuation.
Moving ahead, Twilio is off to a good start this year; its stock price is up nearly 10% year to date. The company recently reported strong fourth-quarter results. It reported earnings per share of zero cents, surpassing the analyst estimate by five cents.
The company’s revenue came in at $82 million, again surpassing the consensus by $7.80 million. That figure also signifies an increase of nearly 60% year over year. The company detailed non-GAAP operating profit of $100,000, compared to $5 million in operating loss a year ago.
Currently, services provided by Twilio are used by Facebook's (FB, Financial) WhatsApp, Netflix (NFLX, Financial), Coca-Cola (KO, Financial), Uber, Airbnb, Amazon (AMZN, Financial) and others. The gradually rising popularity of Airbnb, Uber and WhatsApp could act as a tailwind for the company going forward.
Twilio currently generates a significant portion of its revenue from Facebook, which indicates it is heavily dependent on the social media giant. Facebook, however, has not signed any long-term contracts with the company, which means it could stop using Twilio’s services at any time.
Not only this, but the company also faces tough competition form several small players that offer the same services at considerably lower costs.
Moving toward the international markets, the company generated 15% of its overall revenue from overseas markets in the first nine months of 2016, a 1% surge from 2015. The company is trying to expand its reach in overseas markets, but it observed its experience in retailing products outside of the U.S. is inadequate.
Summing up
Although Twilio’s recent earnings report was the first quarter in which it shared non-GAAP operating profit, it looks like the company will continue to face problems in the near future. The company’s expenses will probably surge in the years ahead due to increased spending on sales teams as well as expanding its footprint in overseas markets.
Despite falling over 50% from its all-time highs, Twilio still looks overvalued and investors can anticipate additional downside moving forward. As a result, investors should watch the stock and wait for a significant dip to initiate a position.
Disclosure: No position in the stocks mentioned in this article.
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