Why I wasn’t so impressed with Twilio Investor Day
Actions of Twilio (NYSE: TWLO) jumped last week after the company held its Investor Day conference. The event touted Twilio’s impressive accomplishments to date and also revealed that the company will exceed its revenue forecast for the final quarter. This pushed Twilio shares up to double digits after the October 1 conference.
Color me confused as to the reaction.
Excellent work to date
There is no doubt that Twilio’s achievements since its founding in 2008 and its IPO in 2016 have been impressive. Over the past two and a half years, revenues have increased 3.5 times, active customers have quadrupled, and developer accounts have quintupled. Twilio was able to maintain and even increase its rate of net dollar expansion over the same period. In the last quarter, the net expansion rate stood at 132%, meaning existing customers increased their spending by an impressive 32% compared to the previous year’s quarter.
Of course, this is all turned to the past, and Twilio’s stock has skyrocketed during that time. Since its IPO in June 2016, Twilio’s stock has risen 19 times its original amount of $ 15 IPO price. While its growth to date is certainly impressive, it’s not as if the market doesn’t recognize it.
The windshield is cloudier
Of course, buying or owning a stock now is a bet on the future of a company compared to its current valuation. In this regard, Twilio’s longer term forecast struck me as a bit disappointing.
Over the next few years, Twilio expects a revenue growth rate of 30% and above for four years. That would be impressive considering that Twilio has already generated almost $ 1.4 billion in revenue in the past 12 months, which is great for a youngster. SaaS company. And in the “longer term” – when it does – society expects adjustments (no.GAAP) gross margins between 60% and 65% and adjusted operating margins of 20%. However, with operating margins adjusted to just 2% today and 1% a year ago, it may take longer to get there.
Keep in mind that the adjusted numbers overlook stock-based compensation, which is very high at Twilio. The company has already spent nearly $ 150 million on stock-based compensation this year, up 15% from the previous year. Stock-based compensation is a real expense, and Twilio still suffers big losses today on an unadjusted basis.
Assuming the company grows revenue by 30% per year through 2024, hits the high end of the gross margin target of 65%, and increases its operating expenses by just 20% (which would probably be optimistic ), Twilio would probably make around $ 200 million to $ 300 million. operating profit in 2024, taking into account share-based compensation.
Today, Twilio’s market cap is around $ 42 billion, so today investors pay around 200 times operating profits in 2024.
Could this even be justified?
It’s understandable that tech companies are investing like mad to achieve long-term growth, but it’s unclear how quickly Twilio can grow beyond the 2024 period. The company claims its total addressable market in 2020 is $ 62 billion, which appears to present a fairly significant opportunity; However, the company’s current 2.4% market share suggests there are plenty more in the space already.
In fact, the cloud giant Microsoft (NASDAQ: MSFT) has just launched Azure Communications Services, which appears to be a competitor to Twilio. It is a very big potential competitor to add to the mix of existing competitors there, which may limit Twilio’s overall market share opportunity or pricing power.
Basically, with a market cap of $ 42 billion today and at best 200 times operating profit in 2024, investors are evaluating a huge amount of good news for many years beyond this medium-term outlook – and they do it in a technology. niche market that attracts large competitors. For this reason, Twilio’s investor presentation made me a little more skeptical of its current valuation, not less.
I’m not saying Twilio can’t keep going higher from here, and the company may be surpassing its own expectations and financial model. However, based on the current trajectory, it’s difficult to reconcile its current valuation, which, let’s remember, is already up 19 times its IPO price just four years ago. Investors should exercise caution.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.