Twilio (TWLO +1.50%) and Line (LN +0.00%) both made their market debuts last year, but their post-IPO gains have been unimpressive thus far. Twilio went public at $15 per share in late June, nearly doubled on its first trading day, surged to almost $70 in September, then retreated all the way back to the high $20s.
Line went public at $32.84 in mid-July, rose about 30% on the first day, and flirted with $50 in late September, but then slid all the way back to the mid-$30s. Both stocks remain above their IPO prices, but most investors who bought the stock on the open market are probably underwater.
Source: Getty.
Should investors consider buying either of these hyped IPOs today? Let's take a closer look at Twilio and Line's core businesses, growth rates, headwinds, and valuations to find out.
How do Line and Twilio make money?
Line's core product is a mobile messaging app which generates most of its revenue from its home country in Japan and three other key growth markets -- Taiwan, Thailand, and Indonesia. Its business is split into four main units -- ads, communication, content, and others.
The advertising business, which sells in-app ads and sponsored stickers, generated 43% of Line's revenue last quarter. Its communication business, which handles paid stickers, themes, and a Skype-like Line Out service, generated 21%. The content business, which sells games, songs, and comics, generated another 27%. The rest of its revenue came from "other" products -- including mobile payments, job searches, and wireless services.
Line's mobile app. Source: Google Play.
Twilio's cloud service lets developers integrate voice calls, text messages, and videos into their apps with simple APIs (application programming interfaces). By subscribing to Twilio's service, developers don't need to write those features from scratch -- which can be buggy, time-consuming, and tough to scale.
Twilio's major customers include Uber, Facebook's (FB 8.99%) WhatsApp and Messenger, Amazon, Netflix, and Coca-Cola Enterprises. Its two biggest customers, Uber and WhatsApp, respectively generated more than 10% and 9% of its revenues in 2016.
How fast are Line and Twilio growing?
Line's revenue rose 16% annually to 38.9 billion yen ($340 million) last quarter, as its double-digit sales growth in ads and single-digit growth in communications offset slight declines in its other businesses. Monthly active users (MAUs) at its four key countries rose 13% annually to 171 million. Analysts expect Line's revenue to rise 36% this year.
Source: Getty.
Twilio's revenue rose 47% annually to $87.4 million last quarter. Its "base revenue," which excludes revenue from big customers (like WhatsApp) that didn't enter 12-month minimum revenue commitment contracts with the company, rose 62% to $80.6 million.
Its dollar-based net expansion, which measures its revenue growth per customer, surged 141% -- indicating that new services (like video) are squeezing more revenue out of its existing customers. Wall Street expects Twilio's revenue to rise 30% this year.
On the bottom line, Line generated 1.6 billion yen ($14 million) in net income last quarter, compared to a slight loss a year earlier. Neither the company nor the analysts have provided forward earnings guidance.
Twilio isn't profitable by either non-GAAP or GAAP metrics. However, its per-share loss narrowed annually by both metrics last quarter. That weak profitability is due to high stock-based compensation expenses, increased investments in R&D and marketing, and tough competition across the cloud market.
The biggest challenges
Line's app remains strong across its four core markets, but Facebook's Messenger and WhatsApp -- which have significantly higher user counts -- could eventually render it obsolete. Line is widening its moat with mobile payments, digital downloads, mobile games, and other services, but Facebook has been doing the exact same thing with Messenger over the past few years.
Twilio's big problem is customer loyalty. It enjoyed a great head start in its niche market, but new challengers like Vonage's Nexmo and internally developed platforms have emerged as long-term threats.
Back in March, its customer Lyft started testing out Nexmo as an alternative to Twilio. In May, Uber dropped the bombshell that it would pivot away from Twilio toward internally developed solutions. If Twilio fails to counter these rising threats, its double-digit growth could grind to a halt.
The valuations and verdict
Line trades at a whopping 99 times earnings. That's surprisingly lower than the industry average of 104 for application software makers, but it's still a nosebleed valuation for a company that is David to Facebook's Goliath.
Twilio can't be measured with a P/E since it isn't profitable, but it trades at almost 9 times sales -- which is pricey relative to the industry average of 6 for software makers.
For now, I think neither Line nor Twilio is a compelling investment. Instead, both stocks seem too risky to own in a market which is already hovering at historic highs with frothy valuations.
