Twilio (TWLO, Financial) is a customer engagement software company that offers a cloud-based communication platform-as-a-service, application programming interfaces (APIs) and prebuilt solution applications aimed at improving customer engagement through multiple avenues.
Through these APIs, the company’s platform allows software developers to integrate messaging, voice and video functionality into new or existing business applications. The company leverages what it calls its “Super Network,” which is their global network of over 1,500 carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.
The company had over 256,000 active customer accounts as of year-end 2021. These customers range from very large to very small, and from long established corporations to brand new start-ups. Examples of customer applications could be a restaurant that needs to notify a diner when a table is ready, or connecting potential home buyers to real estate agents, or usage in large, omni-channel call centers. The company has an approximate 38% market share in this technology segment.
However, Twilio is another victim in the busted growth stock phenomenon, having declined approximately 70% from its highs in 2021 due to the unfavorable macro environment for companies that are losing money. The company went public in 2016 and currently has a $21 billion market capitalization.
Financial review
Twilio is still in a high growth mode with strong double digit revenue growth, but they are generating large operating losses. Organic revenue growth for full year 2021 was 42% and the GAAP operating loss was $916 million. In 2021, the company paid an extraordinarily high level of stock compensation totaling $630.3 million, which was equal to 22% of revenues and accounted for the majority of the operating loss.
The company’s operating cash flow was negative in 2021 at a loss of $58.2 million and the total burn rate for the year was $148 million after capital expenditures of $90 million. After successful equity capital raises over the past two years totaling $3.2 billion, the company has ample liquidity on the balance sheet. Total cash and short-term investments totaled $5.3 billion with debt of only $986 million at the quarter's end.
Valuation
The business model appears to be scalable as stock compensation levels (as a percentage of revenues) trend down and revenues continue to grow. If total revenues approach $5 billion, which some analysts expect in 2023, the company could generate free cash flow with GAAP net profits perhaps in the following year.
I have noticed that several analyst price targets are mostly derived from price-sales ratio targets. Morgan Stanley (MS) believes that Twillio should trade at a forward price-sales ratio of 8 compared to 2023 revenue estimates, or $240 per share, while Bank of America's (BAC) BofA Securities feels it should trade at 10 times their estimate of 2023 revenues, which would be $290 per share. Both banks see strong double-digit revenue growth potential for the foreseeable future.
Twilio's long-term goals include over 30% revenue growth annually for the next three years, 60% non-GAAP gross margins and 20% non-GAAP operating margins.
Guru trades
Gurus who have purchased Twilio stock recently include Catherine Wood (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio). Gurus that have reduced their holdings in the stock include Spiro Segalas and Phillipe Laffont.
Conclusion
Relative valuation calls are tough to make in an environment when almost all tech stocks are going down. Being cheaper than your competitors when your competitors are substantially overvalued is not a great investment strategy.
Twilio faces some major risks, including increased competition, pricing pressures, gross margin pressure and a possible deterioration in the overall economy, both domestically and abroad. Also, continuing to dilute shareholders is a major risk as the company continues to spend heavily on stock compensation.
Twilio has the staying power with a strong balance sheet to outlast some competitors, but when the company starts reporting GAAP profits down the road, the excessive valuations may come be to realized. Waiting for a lower entry point for Twilio stock would make more sense to me, particularly in the current tech stock selloff environment.
