Twilio Inc (TWLO, Financial) is a cloud software as a service (SaaS) provider that has seen one of the most remarkable growth stories since its listing in 2016. The company has been a classic example of a stock that has been in a kind of a perpetual bull run, confusing the best of investors with respect to a suitable entry point. It has been benefitting from the exceptionally strong macro environment for cloud-based platform providers, though its lack of profitability has been a point of concern for shareholders. Let us take a deep dive into the company’s operations and recent developments in order to figure out if it is an attractive investment opportunity or not.
Company overview
Based in San Francisco, California, Twilio is a cloud-based platform provider that helps developers to build, scale and operate customer engagement within software applications across the globe. Its platform includes high-quality application programming interfaces that have the ability to handle the higher-level communication logic needed for a variety of customer engagement interactions. It also helps developers to embed voice, messaging, video and email capabilities into their applications.
Twilio is known to democratize communications channels such as text, chat, voice, video and email by virtualizing the world’s communications infrastructure through APIs that are easy to use yet strong enough to power the most demanding applications of the world. The company has had a remarkable growth story both organically as well as through major acquisitions like SendGrid and Segment in 2019 and 2020, respectively.
Recent financial performance
Twilio’s most recent quarterly result outperformed market expectations. The company reported a top-line of $668.93 million for the quarter ended June 30, which implies a staggering 66.88% growth as compared to the $400.85 million in revenue reported in the corresponding quarter of the previous year. Twilio breezed past the analyst consensus estimate of $598.61 million in revenue.
These revenues translated into a gross margin of 49.52%, but the company had an operating margin of -29.81%.
Twilio’s net loss of $227.85 million resulted in a loss per share of 11 cents, which was better than the average Wall Street expectation of a loss per share of 13 cents. In terms of cash flows.
Twilio reported $21.72 million in the form of operating cash flows and spent $815.47 million in investing activities during the previous quarter.
The CPaaS macro
Twilio is a renowned name in the communication-platform-as-a-service (CPaaS) industry, and it plays a vital role in the apps of Lyft (LYFT, Financial), Uber (UBER, Financial) and Airbnb (ABNB, Financial).
CpaaS is not a proprietary technology, and Twilio faces competition from the likes of Cisco (CSCO, Financial), Avaya (AVYA, Financial), and Microsoft (MSFT, Financial). However, the company has an early bird advantage in this market. It has also expanded its moat by developing Twilio Flex, a cloud-based contact center that clients can program to deploy how, when and where they choose. Twilio Flex is one of the fastest-growing SaaS products of the market and it has the potential to increase the company’s revenue by 64% year-over-year to $1.3 billion.
This growth momentum is expected to continue, and as a result, the company predicts that its revenue will be somewhere in the $670 million to $680 million range for the third quarter, implying 50% year-over-year growth. This impressive guidance has also helped the stock rally.
Research & Markets estimates that the global platform as a service market is expected to grow from $47.29 billion in 2020 to $88.11 billion in 2025 at a CAGR of 13%. This indicates a strong macro for Twilio.
Interactive live streaming upside
The power of video-based content is being used across the globe to create a diversified customer experience. Companies across the globe are looking to enhance their delivery skills and shift investments to platforms that can offer more engagement and interactivity. The rapid upsurge of virtual experiences and the popularity of platforms such as TikTok and Clubhouse have indicated that the next big channel for customer engagement is live audio and video streaming.
To cater to this market, Twilio recently launched its latest cloud-based platform, Twilio Live, which allows businesses to rapidly and seamlessly insert live, interactive audio and video streaming solutions into their apps. Unlike existing solutions in the rapidly growing live streaming market, Twilio Live enables businesses to deliver customized audio and video experiences to fit their specific brand and community needs. It also provides low latency at scale and the backing of the company’s reliable and secure infrastructure coupled with a world-class developer experience. It looks to provide businesses the building blocks that they need to initiate personalized experiences for their communities.
Additionally, this latest cloud-based platform will help companies to easily interact with a broad customer base in a new and exciting way. It is worth highlighting that Twilio Live also helped the Reddit team by bringing voices to their community conversion through its upcoming live audio feature. Overall, Twilio Live can help companies grow their customer engagement platforms while empowering them to build exceptional customer experiences.
Final thoughts
Twilio went public at $15 per share in June 2016, opening for trading at approximately $24, and its current share price is as high as $343. The company’s core business is strong, though its valuation does seem a bit steep at an enterprise-value-to-revenue multiple of 24.9 and a price-book ratio of 5.65.
However, from a shareholders’ perspective, its widening losses, contracting margins and rising share count are impossible to ignore. The company does have a strong dependence on stock-based compensation and secondary offerings, which results in dilution and could lead to an eventual correction in the share price. Overall, I believe that Twilio certainly deserves a place in the watch list of investors, but it might not be the ideal entry point for the stock, despite the exceptional growth rate of its product offerings.
