Twilio – A Future Essential, Or Overhyped & Just Unprofitable? (NYSE:TWLO) | Seeking Alpha

Tallinn, Estland - 04.08.2021: Twilio-byggnaden i Tallinn.

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dear readers/followers,

Reading: How does twilio make money

My investments in growth stocks like twilio (nyse:twlo) have always been very moderate. Although I have a history of providing actionable and profitable advice on such investments, such as my set of articles on prosus (otcpk:prosy) and adyen (otcpk:adyey), I’ll be the first to tell you that these stocks are not my focus.

Still, the insight of a valuation-oriented dividend investor may be valuable to some, if they’re hesitant to invest in a business like twlo.

this is my opinion about twlo.

twilio – the business

I always try to keep things as simple as possible and will have the same tact here.

twilio is a company in the business of offering so-called cloud communications as a service, or cpaas. as service companies are growing, and software as a service (saas) companies are just the beginning here.

The company offers solutions that customers can connect to their operations through so-called APIs, which stands for Application Program Interface, a now standardized way of transferring information.

The company connects traditional telecommunications infrastructure (phone numbers, messaging, voice, iot connection to cellular devices, email, video, live streaming) to the internet through the company’s so-called supernet, aggregated by the apis channel These two areas are the essential foundation for all twilio products, with powerful APIs essentially on top of the fundamental supergrid infrastructure, consisting of over 1,500 carrier connections. think of these two things as interconnected.

TWLO Expansion

TWLO Expansion (TWLO IR)

The company offers customers a very modern and easy way to connect and communicate with their customers and within their own business. The company’s solutions can be easily integrated via the aforementioned APIs into applications and websites, as well as services such as SMS, email and chat functions.

Historically, twilio began before the 2008 financial crisis as a voice calling company, allowing customers to make and receive cloud-based calls. twilio sms, which launched in 2009, was more successful, and since then the company has been on a mission to launch new products and services, either through its own research and development or through more.

Twilio Global Mix

Twilio Global Mix (TWLO IR)

The company is global, with customers in more than 180 countries. there are no dividends from the company. there is no credit rating from s&p; however, with a high cash position and less than 10% debt/limit, it can be argued that twlo doesn’t need such a thing right now.

At a high level, you can see twilio as a “pie” of service offerings. The base layer is the supernet, stacked by channel APIs that form the core layers of the enterprise.

after these two, the company also offers the possibility of adding services. These services include things like identification/verification services, advanced messaging services, and other things.

As the top layer of the “cake”, the company offers very advanced high-end solutions that sometimes act more like cloud-based software suites, such as twilio flex, which is a cloud-based contact center platform, that allows communication platform with the client. it also offers integration with the most common crms. Aside from this, twilio also wants to offer marketing/campaign management.

In addition to this, looking at the top layer, twilio has done several interesting mergers and mergers over the last few years with capabilities that have been inserted into the company’s capabilities. The largest is probably segment, which allows twilio to be used to create incredibly personal marketing/advertising campaigns, thanks to class-leading individualized data collection across multiple devices and sources. this is what prompted the creation of twilio engagement, through which customers can be targeted with individualized engagement regardless of customer stage.

The end goal of this is of course to drive repeat purchases, increase conversion and drive engagement across different digital channels.

The company also has a couple more things in the works, but given the beta status of most of them, I don’t think it’s worth looking into right now.

so that’s twilio in about 600 words, as I see the company. provides customizable communication and engagement/analytics tools for b2c engagement.

the value proposition for a company like twilio

I have no doubt that the company has a very complete and attractive set of offers for customers. do not create a business and get clients like airbnb (abnb), doordash (dash), mercadolibre (meli), glassdoor, shopify (shop), lyft (lyft) and other mass businesses without having attractive products.

people who say that twilio has no business or moat, I say that this is completely false. the company has a strong business proposition and is shaped like a moat.

However, I don’t agree with twilio being “peerless”. There may not be many, or indeed any, companies that do everything that twilio does, but there are certainly competitors that do some of what twilio does, to one degree or another. twilio’s competitors include things like vonage (vg), messagebird, plum voice, vidyo, and others, though again, most of these are only partially in the same businesses and services that twilio is active in.

The company specifies a tam of $4.6 billion, growing to about $22.4 billion by 2028 for cloud communications, and its total tam at $79 billion thanks to data expansion of customers.

Specifically, the company believes it can grow based on the ongoing digital transformation and adaptation of technology/direct-to-consumer sales models, trends that have obviously accelerated significantly during the pandemic. Anything that has focused on home and digital delivery has seen significant growth, so the tools that support this, like twilio, are also growing. the company sees benefits from the pandemic as it helps businesses communicate, even from remote spaces.

Second, the company sees data privacy changes within the increased requirements for proprietary data. twilio, again, solves this problem through its engagement platform and m&a segment. This shift from what is known as third-party data to proprietary data is a net benefit to all companies that work as twilio.

twilio income & benefits

Based on these two or three trends as drivers, we can move forward from here. In terms of revenue, twilio generates revenue in one of two ways.

  • commercial usage-based fees
  • monthly subscription fees

None of these are particularly unusual, and we, as investors, can assume that twilio has priced these various services at pricing points where the company will ultimately make a net profit from its operations.

That’s Revenue: The cost of the company’s revenue comes primarily from fees paid to network service providers based on the respective volumes of calls, services, and other things used.

therefore, it is possible to simplify that the company earns a small margin on the difference between the fees paid and the fees earned.

TWLO Revenue Growth

TWLO Revenue Growth (TWLO IR)

Overall, the company has been able to grow revenue at a relatively impressive pace, although the rate of revenue growth has slowed from 80-85% to less than 60% year-over-year in recent quarters. there have also been one-time effects like elections, pandemic-driven digital adoption/growth, and other things. revenue, simply put, has been strong for several years, and customer growth has also been strong, even if customer growth rates have slowed from 20-24% to less than 17% in the last quarter informed.

The company has pretty solid gross margins, reaching 50-55% and dipping below 50% for just the last two quarters or so. The reason for the continued decline in gross margin is higher fees from certain carriers and higher overall fees from service providers, as well as international expansion, with international margins lower than US-based margins. uu.

As I mentioned, twilio’s profits are the product of the difference between fees paid and fees earned (very simplified), and since the company doesn’t control the cost side of that equation, and may not have the pricing power to push prices up so high, this can hurt margins.

I like numbers. numbers don’t lie we need to understand them, but they don’t lie.

And unfortunately for twilio, his numbers don’t look that stellar.

While revenue growth has been strong and the company’s so-called dollar-based net rate of expansion, or dbner (measuring percentage increase in revenue per customer year over year) has been strong, there are some things to understand here.

The first and most obvious problem is that twilio is not a profitable business. By that I mean your net profit is negative, and these net profit/overall profit numbers have been getting worse for years, despite continued revenue growth. from the beginning of 1q19 to 4q21 we went from a value per share close to negative $0.5 to negative $1.5, and less. FY21 net profit was negative $5.45. the company also does not expect this to change materially in 2022.

Even on an adjusted/non-gaap basis, the company’s earnings are in negative territory. The company anticipates continued revenue growth and some stellar non-GAAP GM levels of 60%, but since all of the company’s forecasts are non-GAAP, they are of limited interest to me.

At this time, management expects to become profitable (albeit without GAAP) by 2023.

The company’s cash-rich position, noted by some investors and bulls, is not something I focus much on, as it is primarily a result of debt and equity, not operating cash flow. While management is to be applauded for its timing, I’m not one to applaud a rich balance sheet being filled this way, even if it means they may pursue more mergers and mergers. a good point about twlo is that at least they are not burning that cash from their operations, but they are mostly “neutral” in terms of cash generation/use.

so what exactly is the problem? why doesn’t twilio make any money, either gaap or non-gaap?

The company has an easy explanation for this. invest. I have to spend money to earn money. you will not find me arguing with this point. Spending in research and development, marketing, workforce growth, and other areas resulted in a negative FCF of $104. In terms of FCF, the company’s cash consumption is worse than in the last 3 years.

I like graphics like this.

Tikr TWLO COGS/Revenues/GM/SG&A

Tikr TWLO COGS/Revenues/GM/SG&A (Tikr.com)

shows me how a company, regardless of industry, flows from one period, in this case 2013, to more recent periods, like 2021. what worries me is the rates of worsening gross margins and the small/no change in cogs/sg&a portions, which suggests to me that the company’s business model, even as it scales, cannot produce a net profit.

TWLO Operating Margin/Expenses/Income

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TWLO Operating Margin/Expenses/Income (Tikr.com)

This is another good exercise in graphics. see how the company, year after year, increases its expenses and its income decreases more and more, with margins that deteriorate more and more (although they are currently substantially higher than in 2013)

I also want to show you another development: stock-based compensation.

TWLO Stock-based Compensation

TWLO Stock-based Compensation (TWLO)

Look, I know stock-based compensation is very popular with loss-making, cash-flow positive tech companies. Usually tech stocks like these are not profitable on gaap but are analyzed via cash flow, but twlo is also not profitable on gaap or non-gaap cash flow.

and his stock-based compensation increased 75% to more than $630 million in a single year.

You won’t find me as hostile to equity-based compensation as some value investors. it allows the conservation of cash in the business and has many other advantages.

The problem is that no matter how you look at it, sbc is an expense. usually companies tend to cover this a bit through rebuys (like putting lipstick on a pig if you ask me), but twlo doesn’t do a lot of rebuys compared to others.

before you dive into the comments to defend stock-based compensation, and that you intend to value two on cash flow rather than earnings/earnings, that’s fine, but then you’ll have to subtract stock-based compensation Actions. and this significantly worsens the company’s cash flow figures.

for those who don’t know how sbc works: here is a relevant example for you.

google (goog) bought back $67 billion worth of stock between 2016 and 2020. its outstanding shares (thus) only changed 2%. why? because google issued more than $47 billion of stock-based compensation during that period.

again, sbc is not a problem; nothing is a problem if we can understand and explain it. it becomes a problem when tech investors want to pretend it’s not an expense. it is. You can’t underpay/not pay employees in cash and then pretend that what you pay isn’t an expense.

I don’t want to dwell on this too much, so let me make my point with this graph.

TWLO Profitability

TWLO Profitability (Tikr.com)

two has never been able to show consistent profitability, regardless of revenue growth. not in terms of eps, not in terms of ebitda, free cash flow – pick any metric you want, pick the company’s adjusted/non-gaap metrics, it’s not profitable.

this is a problem.

the positive catalysts

that was a pretty negative segment, so let’s change it with some advantages. there are many catalysts by which twilio could see success in the future and continue to grow their income.

The company works with very high switching costs. once twilio solutions are up and running, the likelihood of companies developing in-house solutions is very low. they are likely to stick with twilio unless they can make a compelling case for switching to a cheaper/easier competitor.

Being the market leader in the entire segment is of course also a great advantage. The company not only leads CPAAS, it also leads sub-segments such as customer data through its historical and future segment M&A and similar M&A.

twilio’s size is unmatched by any other company on the market. Its clients include every large company you can imagine, with more than 35% of the Global 2000, across all industries and company sizes. There are huge advantages to being the company that uses Amazon (Amzn) or the American Red Cross or Uber (Uber).

You won’t find me arguing that there are positive potential catalysts and fundamentals for this company.

That’s not the problem I see with twilio.

some expectations/forecasting issues…

twilio, and many other companies, like talking about tam, or total addressable market.

As someone with extensive experience in the enterprise space, I’m more familiar with the concept than I’d like to be, and I don’t particularly like it. it all boils down to a very simple fact: companies and individuals often have a deep-seated desire to put the best face on things. tam is exactly this: fooling ourselves with an essential confirmation bias that is not only dangerous for us but also for the companies we work for. relying too much on tam can lead to trying to capture markets that are technically out of reach, or creating products that can never be sold to a consumer.

Instead of letting someone talk about their supposed tam, I like to ask what their mvp/mvm is. that is the minimum viable market. a much more interesting concept, as I see it.

The hot sauce market can be said to be nearly $2.75 billion as of 2021 and is expected to grow at a CAGR of 7.1% through 2028 (source: fortune business). does this mean we should all be jumping to build the next brand of hot sauce? of course not.

I’m not claiming that the twilio space is as crowded as hot sauces, I’m arguing that the concept of tam should be viewed skeptically, at best.

tam, for me, it’s not that interesting. rather, I focus on mvm and customer acquisition costs, orcac. These to me are the bread and butter of a business. If you can convincingly show me that your cac and mvm work together, and you can make a solid margin on your trade, then you have me hooked and I might invest even if your business is incredibly boring.

if you tell me I have to “wait for things to become profitable”, wait for things to “seep” and “mature”, and wait for “synergies” to materialize for a decade before seeing Even a dollar of gaap, I’ll probably send you packing before you finish that sentence.

before you rush to the comments section to point out the flaw in this reasoning applied to a company with twilio’s specs, size, and customers, let me say that I am fully aware that this is not a perfect comparison.

However, I’ll make it clear to you that I don’t like chronically unprofitable companies.

You shouldn’t either.

even if twilio says they could become profitable on a non-gaap basis by 2023, i’m not really interested in owning stocks with negative gaap earnings at multiples of 10x+. the people doing the optimistic valuation work and articles on twlo spend a lot of time defending revenue growth, peer based valuation comparing twlo to companies like microsoft (msft) a comparison that is absurd on several levels but the The biggest of which is that Microsoft has been a profitable business practically since its founding.

We often read things like that compared to its “peers”, twlo is attractive value and that the company has a higher growth rate than a company like msft. that’s all.

growth without benefit is, in the end, meaningless.

Anyone can sell a product or service at a loss; It only becomes interesting if you can do it while keeping some money in your pocket, instead of spending it all on the work of making your sale. if you need to spend $100 on cogs, sg&a, r&d/other expenses to sell a product priced at $50, you won’t win over long-term investors.

…disadvantages of being the first to move…

Being the “first mover” is not necessarily a good thing in a market, although many investors believe it is. why?

everyone goes after the pioneers, first. google glass started and had to shoulder burdens of cost, privacy rights and concerns to the point where they canceled it in 2015. now there is snapchat (snap) glasses.

Being the first is also expensive, as we are seeing for twilio. educating the market is expensive. cac is expensive. R&D is very expensive. Navigating privacy laws is expensive. Consider that a company like Gillette spent $750 million dollars to develop the Mach3 razor. Now, 20 years later, the dollar shave club is offering a bet-anything copy that didn’t cost $750 million to develop.

He has no previous experience to fall back on. you’re making it up as you go and you’re making the mistakes. apple (aapl) is a good example of this. macintosh1 was successful. your next products? Massive mistakes led to Microsoft’s dominance because they learned from Apple’s mistakes.

there is much more to mention – I did a study of this, with the price of educating customers, fatigue due to everyone coming after you from your first success, corporate complacency and someone having to foot the bill upfront, which is what twilio is up against here.

People seem to be treating the company as if, because of their customer base, they are immune from being attacked by the competition or any of these things. I think this assumption is false.

…rate risks that will worsen the lack of profitability…

The current market environment will not make it easy for twlo to become a profitable business.

The company failed to be profitable during a vast zero interest rate market for years with essentially “free money for days”.

what, exactly, would twlo manage to become this profitable behemoth that some people seem to lead, in an environment where they will have to manage 2-7% interest?

These new trends will make the company’s job that much harder, not easier. that’s yet another problem.

…and introspection

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I also have a question for you, the investor/interested person in twlo.

what do you expect from an investment?

is a serious question that most people don’t ask themselves often enough. And I’m not talking specifically about twlo, but about any investment in your portfolio.

You see, many investors spend their days picking stocks that people recommend without having a compelling strategy in mind. this is an error.

I know what I want and what I expect from my investments. I’m looking to outperform the market while staying safe and earning 2-5% dividends annually. this is also what I have consistently achieved for 5 years.

Investors who choose two or similar companies as their investment appear to expect or hope that the company will deliver a 100-600% return over the next several years.

That’s fine, and it’s a totally valid thesis for a company like this if you’re a growth investor.

Of course, such an assumption also carries a substantial amount of risk. what if the company does what most companies do, they just perform similar to how they have been performing? remain in deficit? drive revenue but not profit? in the long term, this business model is not sustainable.

We’ve already seen the decline of many favorite growth stocks that were hyped 1-2 years ago. I think we’ll see a continuation of this trend, particularly when it comes to some of the less profitable names out there.

As long as you know what you want and agree to the expectations and risks involved, you’ll be doing just fine.

The only problem is that people characterize twlo as some kind of blue chip stock.

twlo is not a blue chip stock. it’s an unprofitable growth stock, and not a particularly new one, with a history going back 14 years.

let’s see the valuation

twilio rating

Most analysts rate twilio based on peer ratings.

By doing this, we see that the company is currently trading at a substantially lower valuation than its competitors. it has also lost 55% of its value in less than 5 months.

if we ignore pair multiples for a moment and let me be clear: comparison of twlo to profitable companies should only be done with full knowledge of the shortcomings of such attempts, we can see analysts’ price targets based on the company’s path to eventual profitability in 2023e and beyond.

Analysts’ valuation range illustrates how uncertain and confident we should be in some of these targets, given that they range from a low of $170 to a high of nearly $600 per share. (source: s&p global) this is one of the biggest pt spreads i have seen.

This is an average of $303 per share with 21 of 28 analysts recommending a “buy” here. in fact, you don’t need me to justify your “purchase” here. the company is considered a “buy” in the context of its growth plan, fundamentals, and set of technologies and assets. the upside potential in the event of a reversal to such multiples is huge, well over 100%.

Looking at p/e multiples and the like is obviously a somewhat useless exercise.

F.A.S.T graphs Valuation

F.A.S.T graphs Valuation (F.A.S.T graphs)

p/e on an adjusted basis is negative 363 times, which shows how useless this metric is here. instead, what we can do is look at revenue or sales multiples, which tell us a different story.

TWLO sales multiples

TWLO sales multiples (TIkr.com)

These numbers would imply that if you want to buy two, now or less would be the right time, given the lows we’re currently seeing.

However, actually forecasting this company and hoping when it will be profitable is, as I see it, too risky an exercise to venture into. your stance on investing in the company should allow this business to remain unprofitable until trends pick up the valuation again and you can sell at a target profit, or until we can realistically say we can see the company become profitable and “becomes the next amazon/google”.

As things currently stand, I don’t see the visibility of this as being in any way realistic or predictable.

I will say that it’s almost impossible to tell when exactly a company is making losses with this amount of sbc and a proven track record of growing expenses at a rate equal to or greater than its revenue growth. worsening margins will not change easily as we move into a higher interest rate environment.

I’m not saying the company is getting into fundamental trouble. twlo lacks the recurring cash burn for this to be an issue, especially considering how cash-heavy it is and how good its current ratio is. Remember, however, that the company’s cash-rich position is not the result of good operating performance or cash flow, but rather of equity and debt issuance. it’s like telling your friend who took out a $100k loan that “wow, now you’re rich!”.

In the end, and to me, an investment is really only as good as its conservatively adjusted upside and dividend.

two doesn’t have one and it’s not a profitable business.

I’m not willing to bet money on when, if anything, the company will end up being profitable. twlo offers revenue growth and revenue growth guides. I understand the logic behind investing in twlo.

It just doesn’t have a place in my portfolio right now, and I wonder if it should be in yours.

How deep the company should discount really depends on your views. I do not participate in discounting unprofitable businesses to any optimistic degree. I understand the logic behind investing here with a very long-term time frame and for a potential return of several hundred percent.

but to me, this is too speculative to consider.

I would call twlo a “hold” or what some might call a “spec buy” (but I prefer simple buy/hold/sell), with a pt of $85/share representing a lower sell multiple , closer to 4.5-5x.

I want to clarify that, even at a double-digit price, I would continue to be careful with this company, at least until I see some indication of improving profitability, and not just in non-GAAP.


I realize this might be an unpopular article and stance, given the apparent love of the company by reviewers and readers alike, considering the number of upbeat articles and relative quantitative ratings here.

I’m expecting a decent amount of virulence for this pose, which from what I can tell is the first neutral pose in two in a long time.

I understand the taste for the company as a potentially massive growth stock should it appreciate, but I also think the risk here is greater than investors would like to believe.

I have yet to see a convincing argument for how the company will change its operations and become profitable. the most common thing here is “more growth”, but that sounds like more of the same to me, and history has shown us that all this does is increase costs, not generate profits.

Still, I’m open to being proven wrong and will follow twilio from now on.

so to the question I pose in the title of my article: I think the last word has yet to be said about twilio, and it could go either way.

While the market has seen frantic growth in recent years, and investors love unprofitable companies, I think this is about to change.

However, I would be willing to acquire this company on the cheap once we see some suitable indication of higher profitability. but until then, I’m on hold, and investors are warned.

I guess the easiest way to put it would be to ask if you’re OK with a company that spends 10-25 years growing revenue with unprofitable results and then “might” turn positive, or if you stick with it. that unless they are profitable before they exceed $20 billion market capitalization, they won’t necessarily be easily profitable after that $20 billion.

obviously I maintain the last position.

thanks for reading!

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