Mobile phones have changed the way people communicate in profound ways. Last year, Americans used their mobile devices to send more than 2 trillion text messages and talk for 2.4 trillion minutes. Twilio (NYSE:TWLO) was founded in 2008 to take advantage of the growth in mobile communication and help companies generate voice and text messages through software. It has developed into a $1 billion revenue run-rate business and last quarter grew its top line an impressive 75%.

How could you have profited if you were able to buy shares at the initial public offering (IPO) of this software-as-a-service company?

Young woman looking at cell phone on a train.

Image source: Getty Images

Getting in on the ground floor

The stock was offered to IPO investors at $23.99 and started trading in the public markets on June 23, 2016. Since then the stock has gained over 300% and is trading close to $99 today. A $1,008 investment three-and-a-half years ago would have purchased 42 shares currently worth about $4,152. This has been an incredible run, with Twilio stock gaining 50% annually versus the market's 15% annual returns over the same period.

Just looking at this snapshot, it's been a great investment. But diving in closer to look at the stock's journey, it's been a rocky road. 

Holding a winner requires patience

Some of the markets' best investments have gut-wrenching swings on the way to "monster" returns. In order to be part owner in the best-performing stock from 1998-2015, Monster Beverage investors had to endure four separate 50% drops. Twilio's shareholders have had a bit of a crazy ride too: a 50% drop in its first 12 months, a calendar year in which the stock lost 18% of its value, and a 33% pullback from its all-time high earlier this year.

Metric

IPO: 6/23/2016

End of 2016

End of 2017

End of 2018

12/16/2019

Twilio stock price

$23.99

$28.85

$23.60

$89.30

$98.85

Gain over previous column

N/A

20%

-18%

278%

11%

Data from Yahoo Finance and Crunchbase. Table by Author.

To add to the drama, IPO shareholders were sitting on a paper loss at the end of 2017. It was a great opportunity to buy for those not yet in, but any shareholders who gave up on the stock at that point would have missed the incredible 278% gain of 2018.

TWLO Chart

TWLO data by YCharts

Even though the company has had an impressive run so far, this communications platform is really just getting started.

What's ahead for Twilio?

The company is an expert at the land-and-expand strategy to drive growth. It starts with a software developer who downloads and creates a prototype using Twilio's easy-to-implement software. The prototype helps a company realize the power of the tool and the untapped opportunity for its enterprise. Once on the platform, customers regularly implement more communication capability, resulting in more revenue for Twilio. The results have been impressive. Over the past seven quarters, the dollar-based net expansion rate has exceeded 130%, meaning customers on average spent 30% more on the platform than they did a year ago. For the last seven quarters, year-over-year revenue growth rates (excluding the SendGrid acquisition) have topped 45%.

CEO and founder Jeff Lawson ended the most recent shareholder letter saying, "On our mission to fuel the future of communications, it is still Day One." If the idea of "day one" sounds familiar, it is. Amazon's CEO Jeff Bezos uses the "day one" phrase to describe the e-commerce company's incredible opportunity ahead. Lawson spent time as a product manager there before founding Twilio and has adopted that mindset. With the communications platform having only a small sub-3% share of a huge $45 billion market, it's no surprise that Lawson thinks this way. With that perspective and Twilio focusing on executing its growth strategy, patient shareholders should enjoy market-beating gains for years to come.