Twilio is a California-based cloud communication platform-as-a-service (PaaS) company that was founded in 2008. It enables software developers to use digital communication such as calls, texts, and emails to enhance the user experience and is sitting at all-time highs after stating that it is expecting better than expected Q3 revenue. The stock has rallied from March lows and is up a few hundred percent since then, but is Twilio a good investment?

The bull case for Twilio

Twilio is benefitting from secular tailwinds brought on by COVID-19 as highlighted in a recent global survey by the company of over 2,500 enterprises. The survey found that the pandemic has accelerated 97% of companies' digital communication strategy by an average of six years in a matter of weeks as companies identify new ways to communicate with customers. The market that Twilio is operating in is set to increase from a valuation of $62 billion today to $87 billion in 2023.

Twilio has a well-diversified customer base across various industries, company sizes, and now has over 200,000 customers. This diversification has offset any declines in individual companies, and others like Zoom have increased its partnership by adding email by Twilio to support customers during this growth. Twilio's dollar-based net expansion rate for Q2 2020 is 132% compared to 123% in Q4 2017, its last Investor Day, demonstrating the increased spend by customers.

In Q2 2020, Twilio reported 46% revenue growth year-over-year (YoY) to $401 million, including 27% international revenue. The last quarter was the first time the acquisition of Sendgrid was fully integrated and boosted the balance sheet. Management is very optimistic about the future and is forecasting 30% organic annual revenue growth in each of the next four years. It is also predicting 60% to 65% adjusted gross margin over the long-term. 

An important factor when investing is the management team and Twilio has one of the most diverse of any publicly-traded company. Out of the 13 members on the management team, 6 are women from a diverse range of backgrounds. Co-founder and CEO Jeff Lawson has an impressive 92% approval rating on Glassdoor and overall Twilio has 4 out of 5 stars and was also named in the 100 Best Workplaces for Innovators.

The bear case for Twilio

Twilio's top 10 customers accounted for 15% of revenue, with Facebook's (NASDAQ: FB) WhatsApp contributing 7% alone. If Twilio were to lose WhatsApp as a customer, this would have a material impact on revenue. However, due to the diverse nature of Twilio's revenue, the loss of any of these top 10 customers would not be detrimental to the company but may temporarily decrease its growth rate.

Perhaps the biggest threat to Twilio is Microsoft's launch of Azure Communication Services, which will enable developers to add features such as voice and video calling. This model is remarkably like Twilio's and Microsoft can bundle this with its other cloud-based services. Microsoft also has a huge cash pile which can be used to try and grow this new service. Twilio is a smaller and more agile company that knows the market inside out, and even with the competition is not likely to be a winner takes all scenario.

Twilio's valuation at roughly 25 price to sales is high, and management will have to execute on the forecasts set out to justify this. Increased competition, along with the massive run-up in the stock price in recent times, will likely cause the stock to be volatile. It is also operating at a loss which widened in the last quarter to $102.6 million compared to $93.7 million from the year prior.

So, should I buy Twilio stock?: 

Twilio is a high-quality business with good leadership and effective execution. The company is also benefiting from what appears to be multi-year tailwinds. Without doubt, competition and the company's valuation may cause investors to question an investment in Twilio; however, it appears to be positioned to grow significantly in the coming years. 

Quickfire round: 

Does Twilio pay dividends?

No, Twilio does not pay dividends.

When did Twilio go Public?

June 23rd, 2016.

What are real-life examples of Twilio in use?

WhatsApp verification, Airbnb automated SMS messages, and Twitch use Twilio for two-factor authentication.

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