Twilio: Investors Need To Give It Time To Scale Up And Be Profitable

seekingalpha2021-06-21

Summary Twilio has been misunderstood as a stock that benefited only from the COVID-19 tailwind and it would fizzle out when reopening takes centre stage. Meanwhile, the company has continued to ...

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Pres1
2021-06-21
Pres1
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Stevenzt
2021-06-21
Stevenzt
kk
Bangaram
2021-06-21
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2021-06-21
ALi_BaBa
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- ALi_BaBa:
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67d648f1
2021-06-21
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Nickmons
2021-06-21
Nickmons
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While it may have yet to be EBIT profitable, the company is setting itself up to be the CPaaS leader with a top notch customer engagement platform, following its acquisition of the No.1 Customer Data Platform [CDP] in the world: Segment. Investors should understand by now that the secular tailwinds driving digitisation are not going to reverse, and therefore TWLO is in a prime position to benefit as the platform for the world on their customer engagement needs. Add on the impending deprecation of third-party cookies, companies would likely find TWLO even more important in their customer engagement efforts moving forward. At its current valuation, investors should find that TWLO may actually be valued at a discount to many of the stocks listed in the SaaS space.\nTwilio is Not your Typical SaaS Stock\nDBNER. Data source: Company filings\nTwilio’s value proposition as a CPaaS is unlike the typical SaaS company that makes the most of its revenue through recurring subscriptions, and increase or maintain their DBNER or DBNRR by cross-selling into other products or up-selling their customers by taking on more seats. TWLO’s revenue is mainly based on usage. Therefore the company makes more revenue when customers use its platform more, and make less when customers use it less. Therefore, because it’s based on usage we could easily determine the strength of its customers' usage simply by observing its DBNER trend.TWLO’s DBNER “increases when such Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product. Twilio’s Dollar-Based Net Expansion Rate decreases when such Active Customer Accounts cease or reduce their usage of a product or when the Company lowers usage prices on a product.”\nTherefore, we could clearly observe from TWLO’s strong DBNER trend that its customers have been consistently increasing their net usage of its platform over the years, which actually already begun before COVID-19 hit. TWLO’s DBNER has been largely consistent as well and the company was also confident of achieving a normalized DBNER in the range of 130s moving forward.\nMoreover, the company has also highlighted that it continued to see increased use cases in its platform in many industries, and in particular in telehealth, which is another market that has been wrongly perceived to be only a COVID-19 phenomenon that has no sustainability. We have previously covered in a recent article on Teladoc (TDOC) on why telehealth’s rapid growth has begun well before the pandemic hit and is still very early in its growth phase as the market is expected to grow by more than 20% CAGR over the next 10 years. Therefore the secular tailwinds that are driving digitisation across many different industries would also drive increased business to TWLO as the market’s leading cloud communications and customer engagement platform.\nSaaS DBNER/DBNRR. Source: Atom Finance\nThis is especially so when we look across the SaaS space. Investors would be hard-pressed to find many companies that boast a NRR that has been consistently above 130% like TWLO (median: 120%). Another company that also uses usage-based pricing: Snowflake (SNOW) had a NRR of 168% in the latest quarter. Investors may think that these companies that adopt usage-based pricing may suffer if their customers drop off their usage rates drastically. However, TWLO and SNOW have both proven that their platforms are so sticky and offer so much value that once you are on it, you would keep using it more and more over time, and also expand usage into new products. Therefore, this usage-based pricing model has an inherently powerful booster to the company’s topline as use-cases kept increasing, something that a typical subscription-based ARR model may not be able to replicate without a usage-based model.\nMarket Truly Underestimated Segment's Acquisition\nIn our opinion, we think the market really underplayed Segment’s acquisition for TWLO. First, Segment is the No.1 CDP worldwide ranked by IDC, so we think TWLO has done an amazing deal there. In fact, the company emphasized how important they thought the acquisition meant to them (emphasis by us):\n\n We think the \n industrial logic of Segment plus Twilio is just a -- it's not just a home run.It's a grand slam. I think for us, having data capabilities married with communications capabilities is absolutely essential to deliver that rich customer experience.\n\nNotwithstanding the significant dilution funded from the mostly equity deal, I think investors should understand the strategic importance of having the best-of-breed CDP in its portfolio, which is crucially important to TWLO’s underlying CPaaS offering as it now confers its customers the access to real-time analytics with a unified view across disparate systems.\nLevel of impact of CDP on success metrics. Data source: Advertiser Perceptions; Treasure Data\nWe could observe from the above survey conducted with marketers across different industries on the profound impact of having a CDP in their marketing KPIs. The large majority of the respondents noted an improvement across all the metrics listed in this survey with a remarkably high percentage of the respondents (33% to 45%) indicating “significant improvement” in the respective categories.\nBenefits of CDP according to marketing technology decision makers. Data source: Advertiser Perceptions; UniFida\nIn addition, 49% of the respondents also indicated that the CDP allowed them to unify data across multiple sources, which they regarded as the most important benefit. Twilio also highlighted the importance of this as it added that “consumers are no longer tied to just one form of communication, and they expect companies to pull together disparate interactions to deliver increasingly personalized content based on what they’re doing -- anytime, anywhere, and over their preferred channels.”\nMeasures undertaken by marketers from the U.S. to counter the impact of the deprecation of third-party cookies. Data source: Epsilon; Adweek; Phronesis Partners\nMoreover, with the impending deprecation of third-party cookies, marketers have been looking for ways to cushion the impact of this loss, and the majority of them (67.3%) have been building a CDP. CDPs primarily collects and use first-party data, which is really the most important sources of customer data as it offers the most accurate and actionable insights, and also the one that is least vulnerable to privacy regulations, a point that was also acknowledged by TWLO when asked whether TWLO saw any tailwind on privacy regulations due to its first-party data access, of which the company replied:\n\n 100%. I think you hit the nail on that actually and effectively answered your own question. I think they're very much on the right side of this. I mean they are very, very strong data stewards. They're kind of a privacy-first company. I think even in the EU, some of the trends in geodynamics also play in their favor. And so I do think data and data regulations is a potential tailwind for them, yes.\n\nShare of organizations collaborating with others to share first-party data in the U.S. Data source: Winterberry Group; LiveRamp\nIn order to further underscore the importance of first-party data, we could see that 64.3% of companies had collaborative arrangements to share first-party data while 16.7% had plans to do so. In a post-cookie world, I believe organizations would even need to be more proactive in its data gathering and analytics efforts, and having a CDP like Segment to help in this would be absolutely critical.\nYes, We Know That The Company Is Still Unprofitable\nEBIT margin, SG&A margin, R&D margin. Data source: S&P Capital IQ\nNevertheless, investors should be reminded that TWLO has yet to turn an operating profit, even though the company has guided to a long term operating margin of 28% over time. Investors should understand that TWLO would also not be expected to turn an operating profit anytime soon as the company is still in a heavy investment mode (as seen in its high SG&A and R&D margins) as it sees a lot of opportunities to invest and also possibly acquire, where it had made a number of high profile acquisitions such as Segment, ValueFirst, Syniverse, Zipwhip among others. The company strongly emphasized this point:\n\n But that doesn't mean that we won't be profitable, can't be profitable. I mean, we're growing at very elevated levels, certainly better than our corporate average, if you will. It's just that the rest of our business is growing really fast, right? So for it to really show up in our financials, based on our current trajectory, something else would have to slow down, which is not what we want. It's not what you want. It's not what anybody wants really, right? So I think in due course, all these things will happen.\n\nTherefore, TWLO investors are asked to demonstrate lots of patience, give time for TWLO to grow into its profitability and allow them to continue scaling up its revenue growth first. Consensus estimates see the company continuing to grow rapidly at about 44.5% YoY for FY 21 and also above 30% YoY subsequently. TWLO has also committed to grow its revenue above 30% for the next four years, so investors need to give TWLO time to deliver the goods, and this stock is therefore not for short term investors who are looking for a 2 to 3 year horizon, or a company that is prioritizing profitability over growth.\nRevenue metrics. Data source: S&P Capital IQ\nValuations\nSaaS EV / 2021 Rev.\nTWLO EV / Fwd Rev. Data source: S&P Capital IQ\nWhen we consider TWLO’s EV / FY+1 multiple of 20.6x against the SaaS median of 26.3x, it may be reasonably argued that TWLO doesn’t look expensive. It’s also important to note that TWLO is also expected to grow rapidly where we expect to see its multiple fall significantly over time (assuming its EV stays constant, which of course will unlikely to be the case if TWLO continues to deliver its high growth strategies). We are pretty sure that there are many more companies within the SaaS space that are valued at a much higher premium and yet with a slower expected revenue growth profile.\nPrice Action and Technical Analysis\n\nWe think that TWLO has a generally strong long term uptrend bias that was only interrupted once by the COVID-19 bear market over the last 3 years. The price recently found support along the 50W moving average at around $300 and the price has since gradually continued to recover from its recent slump.\nAlthough we would prefer to add more positions near the $300 support level, we don’t think the current price level is expensive either, and think that investors may consider initiating or adding on to their positions at the current price level. They should however avoid adding near the $405 level as we believe that there should be near term resistance at that level. In addition, for investors who would prefer somewhat of a slight bargain, you may wait till the next retracement to test the 50W support again, of which a $320 level to add is also possible.\nWrapping It All Up\nTwilio is a very high growth stock that has made revenue growth its most important priority right now as it sees tremendous growth opportunities ahead. Investors are asked to give TWLO time to grow into its expected long term profitability as the company sets itself up to be the leading player in the cloud communications and customer engagement space for companies across multiple industries.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":167737400,"gmtCreate":1624284432500,"gmtModify":1634008404084,"author":{"id":"3574230745337822","authorId":"3574230745337822","name":"Pres1","avatar":"https://static.tigerbbs.com/5a2b73492ce4a3c8b87eebe05a2ca7db","vip":1,"crmLevel":4,"crmLevelSwitch":0,"authorIdStr":"3574230745337822","idStr":"3574230745337822"},"htmlText":"Tell me your opinion about this news...","listText":"Tell me your opinion about this news...","text":"Tell me your opinion about this 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