When you get a text that your Lyft has arrived, or an automated voice mail from your bank letting you know about a deposit, it's seamless. No one stops and thinks about the technology behind those messages.

But enabling companies to communicate with their customers is big business. Increasingly, Twilio (NYSE:TWLO) is the company behind the scenes making it all happen. Last week, I purchased shares of Twilio for my own portfolio. Here are ten reasons why.

Macro photo of tooth wheel mechanism with COMMUNICATION concept related words and icons imprinted on metal surfac

Image source: Getty Images

1. A clear, optionable, inspirational mission

Mission statements matter. While some consider them to be corporate gobbledygook, they can offer a window into a company's soul. The best mission statements have three traits:

  1. They are simple enough to help dictate employees' actions.
  2. They are optionable -- meaning they can be fulfilled in a myriad of ways.
  3. They are inspirational, giving the company a broader purpose than just making money. 

Twilio's mission statement checks all three of those boxes:

By empowering [software developers], our mission is to fuel the future of communications.

2. Growing like a weed

That mission has enabled Twilio to attract customers, and with them recurring software-as-a-service (SaaS) revenue. The number of active customers using Twilio's platform to communicate with their clients has increased four-fold in four years.

Chart of active Twilio customers over time

Chart by author. Data source: SEC filings.

Concurrently, base revenue -- which excludes low-margin professional services and customers that don't sign long-term contracts -- has exploded.

Chart of base revenue growth at Twilio over time.

Chart by author. Data source: SEC filings.

All of this is to say: Twilio has been an extremely popular option over the past five years.

3. High switching-costs

None of that growth would matter, however, if well-heeled competition could come in and steal it away. That's where the power of Twilio's sustainable competitive advantages -- its "moat" -- comes into play.

Twilio's largest moat comes in the form of high switching-costs. Once developers start using the platform, their companies become more and more dependent on it to communicate with clients. 

The best way to measure this is by the company's dollar-based net expansion rate (DBNE). This takes all recurring revenue from one cohort of customers in Year One and compares it to the revenue those same customers pay in Year Two.

Chart showing DBNE at Twilio over time

Chart by author. Data source: SEC filings.

By filtering out the effect of new customers, this tells investors whether customers stay with Twilio (DBNE near 100%), and if they do, if they are paying more year after year (DBNE over 100%). 

With such a huge DBNE, it's clear that Twilio customers are not only staying with the company, but adding more and more functionality every year. That means Twilio's platform becomes more and more embedded in the DNA of its customers. Switching to a different platform would be painful, both logistically and financially.

4. A growing network effect

But when it comes to moats, Twilio isn't a one-trick pony. The company is increasingly benefiting more and more from network effects. 

Here's how it works:

  • Twilio Super Network is what allows customers to communicate with any client, anywhere in the world, at any time.
  • The more data running through the Super Network's servers, the more accurate and powerful it becomes.

Here's what the company had to say about those effects in its annual report:

With every new message and call, our Super Network becomes more robust, intelligent and efficient...Our Super Network's sophistication becomes increasingly difficult for others to replicate over time as it is continually learning, improving and scaling.

Because it would be almost impossible for competition to immediately capture 64,000 paying clients like Twilio has, it would be very difficult to match the power of the Super Network.

5. About that optionality...

Optionality is a simple way of saying there are lots of different ways a company can grow revenue. For most of its corporate history, Twilio's services revolved around messaging, voice, and video. 

But who's to say those three will be the dominant forces in the future? Management has already shown its ability to roll in other forms of communication. The 2018 acquisition of SendGrid expanded the Twilio platform to include email.

There's little reason to believe Twilio wouldn't follow a similar pattern if other forms of communication crop up.

6. Concentration no longer an issue

One of the biggest question marks for Twilio has been concentration risk. Uber accounted for over 10% of the company's revenue in 2016. If Uber decided to go elsewhere, investors worried that the stock would fall dramatically.

That's exactly what happened in May 2017. But since then, Twilio has had no problem adding customers and getting them to pay more year after year. Just as important, no customer now accounts for more than 10% of sales.

7. It can bring in cash flow

Small and growing SaaS companies are rarely profitable. Investors are usually willing to deal with this because the aforementioned switching costs and network effects lock customers in for the long haul. Capturing market share today leads to profits tomorrow, the reasoning goes.

But Twilio is already bringing in cash. At the end of last year, the company had a net cash position of $314 million and brought in $3.3 million in free cash flow. That's not a ton, but it's a clear demonstration of Twilio's profit potential at such an early stage.

8. Founder-led

The Motley Fool long been a fan of founder-led companies. When you start a company, you will often view it as an existential extension of yourself. You are naturally incentivized to build something that will stand the test of time. CEOs who fall into the role later are less likely to have such an outlook.

Twilio CEO Jeff Lawson founded Twilio after working at three other start-ups. He's in this for the long-haul, and has done an excellent job shepherding Twilio over the past decade.

9. Skin in the game

It's also a good sign when executives own lots of stock. When they do, their long-term financial interests are aligned with those of individual shareholders.

As of Twilio's last proxy statement, insiders owned 19.5% of shares outstanding, worth over $3 billion at today's prices. Lawson owned 8% of shares outstanding, while board member Byron Deeter of Bessemer Venture Partners owned 9.9%.

10. Employees love it

Finally, it's always worth investigating what employees think of their employer. Not everyone can own lots of shares of the company they work for, but if they love where they are they are more likely to delight their customers.

According to reviews at Glassdoor.com, Twilio garners a 4.4-star rating (out of 5), with 99% approving of Lawson's work and 86% saying they'd recommend a job at Twilio to a friend. Those are all very high marks.

Should you buy?

Does this mean Twilio is absolutely right for your portfolio? Perhaps yes, perhaps no. Twilio is definitely a more volatile stock that requires patience and a long-term outlook. Those nearing or in retirement may not want such a holding in their nest egg.

But for those who are intrigued and willing to do their own due diligence, consider buying a small portion to get your skin in the game. From there, continue getting comfortable with the company and adding more shares in small portions over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.