Cloud communications platform Twilio (TWLO 1.08%) and messaging app Line (LN) were two of the most talked-about tech IPOs of the summer.
Twilio went public at $15 per share on June 23, raising $150 million and finishing its first trading day with a 92% gain. The stock now trades nearly 180% above its IPO price at about $42 per share. Line went public on July 14 at $32.84 per share, raising over $1.1 billion to become the biggest tech IPO of the year. The stock closed its first day of trading with a 27% gain, but that gain has since faded to about 11%. Is either stock worth buying at current prices? Let's examine their businesses, growth trajectories, and valuations to find out.
What does Twilio do?
Twilio's cloud platform enables companies to interact with customers by connecting phone numbers to mobile apps. Major customers include Facebook's WhatsApp, Uber, and Airbnb. Twilio enables WhatsApp users to add contacts via their phone numbers, Uber passengers to call or text their drivers within the app, and Airbnb hosts to call potential guests.
WhatsApp. Image Source: Google Play
In the past, developers built these communications platforms from scratch, which was costly, time-consuming, and buggy. Twilio solves that problem by offering its platform as a cloud-based service, which is a much cheaper and more reliable option. Services like Twilio appeal to "no stack" start-ups like Uber, which focus on creating a single service like ride-hailing while using Twilio for in-app communications, PayPal's Braintree of payments, and Alphabet's Google Maps to find routes.
Twilio's sales growth reflects the surging demand for its service. Revenue rose 88% to $166.9 million in 2015, up from 78% growth in 2014. It generates most of its revenue by charging developers per-minute rates for calls, per-message rates for text messages, and monthly rates for dedicated Twilio phone numbers.
However, Twilio's net loss widened from $26.8 million in 2014 to $35.5 million in 2015 due to surging operating expenses. Twilio also depends heavily on WhatsApp, with 17% of its revenue coming from the app last year. Twilio warns that WhatsApp "has no obligation to provide any notice" before it stops using its platform, meaning that nearly a fifth of its revenue could suddenly vanish.
What does Line do?
Line launched in 2011 in response to the Tohoku Earthquake, which took down phone networks across Japan and forced rescue workers to rely on Internet-based messaging apps. Over the following years, the app evolved into Japan's most popular messaging app and expanded into Taiwan, Thailand, and Indonesia. Those four countries now account for two-thirds of Line's 218 million monthly active users.
Image Source: Google Play
Line revenue rose 38% to $1.12 billion in 2015. That revenue mainly comes from sticker sales, mobile games, ads, and character licensing fees. Sticker sales account for about a fourth of its total revenue. However, Line's active user base grew less than 1% last year, indicating that while it was generating more revenue from its existing users, competing apps like Facebook Messenger and Tencent's WeChat are challenging its growth potential.
Line has been testing out new services like mobile payments, ride hailing, deliveries, chat bots, and live music and video streaming, but its monolithic messaging rivals are also adding similar services. If Line doesn't expand aggressively into new markets and launch new services, its user growth could stall as its revenue growth decelerates -- which would be similar to Twitter's current predicament.
Line was profitable in 2014, but it slipped to a net loss of 7.97 billion yen ($71 million) last year, due to higher operating expenses incurred from adding new services. That net loss will probably widen in the future, due to the company's need to expand to attract more users.
What do the valuations tell us?
Twilio's price-to-sales ratio of 17 is very high relative to other tech companies with stronger growth trajectories. For example, Chinese social networking platform Momo, which posted 199% sales growth in 2015, currently trades at 14 times sales. Line trades at just five times sales, more in-line with its peers, but the stock is likely cheaper, because investors think it will face greater headwinds than Twilio.
I personally wouldn't buy either Twilio or Line right now. Twilio has a great business model, but the stock seems too hot to handle after its recent rally. I'd wait until after it reports earnings on Aug. 9 to decide whether or not to pick up any shares. As for Line, I'd avoid the stock until it can prove that it still has room to grow.
