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Twilio's Uber Bomb: Why Investors Shouldn't Panic (Yet)

By Leo Sun - May 6, 2017 at 12:00PM

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The cloud service provider’s bombshell about Uber caused the stock to crash, but investors shouldn’t sell their shares yet.

Shares of Twilio (TWLO 7.37%) recently plunged over 25% after the cloud service provider reported its first quarter earnings, which beat analyst expectations but spooked investors with troubling news about its biggest customer. Twilio disclosed that Uber -- which contributed 12% of its revenues during the quarter -- would pivot away from its platform in favor of other internally developed or third-party alternatives.

In response, Twilio reduced its full-year sales growth forecast to 28%-31% growth, missing analyst expectations for 33% growth. It also guided for a non-GAAP loss between $0.27-$0.30 per share -- which was well below the consensus forecast for a $0.16 per share loss.

Those numbers sound bad, but I believe the subsequent sell-off was far too steep. Let's discuss three reasons why you shouldn't follow those panicking sellers out the door just yet.

A man checks notifications on his smartphone.

Image source: Getty Images.

1. Uber isn't abandoning Twilio

Much of the hysteria about Twilio stems from the misconception that Uber is dropping all of the company's services. That simply isn't true -- CEO Jeff Lawson stated during the conference call that Uber was "optimizing" its platform by usage and geography with a "more active multi-sourcing program" which would also utilize some internally developed technologies.

This means that Uber will split its voice call, text, and other services between Twilio and other cloud providers, but it's not completely dropping its services. Lawson noted that Uber "will remain an important customer" for Twilio in the future. Moreover, Uber is still a "base" customer which has signed a minimum revenue commitment contract with Twilio, so it's highly unlikely to ditch the platform anytime soon.

Uber wasn't even the first Twilio customer to shop around for other vendors. Lyft also recently announced that it would test out Vonage's (VG -1.80%) rival Nexmo platform as a potential alternative to Twilio's services.

2. Uber's importance was already waning

A gradual reduction in Uber's business is also far less alarming when we notice that its contribution to Twilio's top line has already been waning. But even as Uber's contributions waned, Twilio's top line continued growing.

 

3Q 2016

4Q 2016

1Q 2017

Uber's contribution

13%

17%

12%

Twilio's base revenue growth

75%

73%

62%

Twilio's total revenue growth

62%

60%

47%

Year-over-year growth figures. Source: Quarterly reports.

These numbers indicate that other major customers can easily pick up the slack as Uber's weight on Twilio's top line declines. Investors should also remember that Twilio's biggest customer frequently changes -- back in fiscal 2015, its top customer was Facebook's (FB 1.82%) WhatsApp by a wide margin. Facebook notably expanded that relationship last year by integrating Twilio's services into Messenger.

3. Growth figures remain robust

The Uber story also overshadowed the fact that Twilio's core growth remains robust. Active Customer Accounts grew 42% annually to 40,696 last quarter, indicating that it remains a "best in breed" company for handling voice calls, texts, videos, and other features for app developers across a cloud-based platform.

The growth of direct rivals like Nexmo and internally developed alternatives is troubling, but Twilio's growing list of customers -- which includes Netflix, Coca-Cola, Airbnb, and Facebook's WhatsApp and Messenger apps -- remains impressive. Twilio is also adding additional enterprise and security features to its platform to lock in those customers and generate more revenue.

But mind these other issues...

Despite all the drama about Uber, Twilio's forecast for roughly 30% sales growth this year still looks solid. Therefore, its steep post-earnings sell-off -- which knocked its P/S ratio down to 4.8, compared to the industry average of 5.5 -- might represent a buying opportunity for more daring investors.

Unfortunately, Twilio's projected non-GAAP loss for the year -- which is much wider than its loss in 2016 -- still looks bad. Its cash and equivalents also dropped 61% sequentially to just $118.4 million last quarter. If those downward trends continue, Twilio may need to take on debt or issue another secondary offering to raise cash -- which would indicate that it's time to sell the stock.

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