Twilio has long been the darling of wall-street investors and enterprise customers alike. However, the recent tech sell-off has more than wiped out this momentum despite continued excellent performance. In fact, just last week the stock was below 2019 prices, despite 250% revenue growth, and a clearer path to profitability. All of this has combined to make the stock a top pick for those looking to take advantage of the current environment.
So what does Twilio actually do? In a few words, they are a communications API platform that allows companies to better communicate with their customers. Whenever you communicate with drivers on Uber, or property owners on Airbnb, through the texting features, that is Twilio’s flagship product at play. And the now-standard bubble at the bottom right of every website with the ability to text the website for help is their work as well (Yes, exactly like my website!). Luckily for investors, Twilio hasn’t just stopped there. Twilio offers a whole host of tools to help sellers better manage and sell to their clients. They offer Voice API’s that allow for analysis of metadata from calls, queue management... They also provide things like email marketing, or the vaunted Flex platform that allows the creation of an omnichannel communications contact center - allowing for the combination of potentially all tools to optimize service & conversion. Essentially, they are a quintessential CRM play, similar to my other favorites Zendesk and Salesforce. One big differentiator though is that Twilio generally charges on a usage basis, instead of a per seat basis. The main advantage of this is not needing to always find new subscribers to keep growing revenue, since as the product is rolled out and proves useful, you grow along with it. Obviously, if the product isn’t as used, or takes a while to roll out, revenue could take a hit. Luckily, the model has been working out splendidly and has allowed the company to achieve dbne rates of above 130%, and along with more customers, total revenue for the past year was up 60% (in addition to acquisitions).
Something new to keep in mind is the company’s ingenious acquisition of data analytics provider Segment. Segment helps businesses collect, cut up and analyze all their customer data from all their different touchpoints. This feeds directly into the Twilio ecosystem, as now, companies can communicate with their customers, then analyze the success of their programs, and tailor their Twilio programs accordingly - all under the same roof. This feedback loop has been incredibly lucrative and has allowed a massive cross-selling opportunity - and is just another differentiating factor for the company. Something to note though is that the acquisition added a substantial amount of revenue making the headline growth numbers much higher than they would be otherwise. The organic numbers are in fact closer to 35% (with for example, recent dbne at 126%, leaving around 10% for new customer additions).
All in all, it is pretty obvious that Twilio is running an excellent business, benefiting from secular trends that were seemingly only boosted by Covid (not pulled forward), and is simply being beaten down because of macro conditions, and not its real business prospects, moats or future growth. As investors, this can spell a great opportunity!
Twilio currently has between 5-6B of net cash after subtracting its debt. This excellent cash position gives it a current Enterprise Value of 16B, and should help tide it over as it continues to invest heavily in growth over profitability. It is important to keep in mind that the company has been investing heavily to do two primary things: 1. improve revenue synergies and ensure that things like economies of scale allow it to hit their long-term target of 65% gross margins 2. invest in building out infrastructure and sales force to facilitate growth and capitalize on the current need for digital transformation.
Although it is unfortunate that the company isn’t making money, management has made it clear that this is a conscious choice and that they could be profitable at any time, in fact, even with the investments they are relatively close to doing just that - they are even expected to be profitable in 2023. With this understanding, we can now undergo our traditional Exit Multiple analysis on the company:
In the best case scenario: with an 11% required rate of return, a 30% growth rate for 5 years, 25% 5 years after that, the corresponding 45 f p/e, and a 15% net income margin, you would get a value of 130B, over 6x higher than the current Enterprise Value
A middle of the road scenario (much more realistic): with the same required rate of return, a 25% growth rate for 5 years, and a 18% growth rate for 5 years after that, with a corresponding, 32 f p/e, with a 12.5% net income margin would give you a value 43.5B, over 2x the current price.
In order to get the current valuation, you would need a growth rate of 17% for the next 5 years, 13% for the 5 years after that, the corresponding 26 f p/e and only a 10% net income margin.
All in all, it is clear to see that the current market expectations are overly pessimistic, as to get to current values, you need to expect a massive slowdown in a business that has shown no sign of it. In contrast, it has repeatedly smashed analyst expectations, and is maintaining incredibly rapid growth rates off the back of global digitization trends poised to persist. As such, there is substantial upside for patient investors willing to ride out the volatility associated with being an unprofitable enterprise in this kind of market.
By: Mateo Gjinali
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