Ten years ago, it would have been unheard of to receive a call from your ridesharing driver or get a text that your prescription was ready. But today, mobile communications are commonplace, thanks in part to Twilio (TWLO 5.75%). Its software platform makes it easy and inexpensive for businesses to communicate with customers.
Since its founding in 2008, it's built a billion-dollar revenue business, and shareholders have benefited along the way. Could this stock be a millionaire-maker from here? Let's find out if Twilio can achieve a return of 10 times in 20 years by analyzing the size of its market, identifying whether or not it has a sustainable competitive advantage, and looking to see if it has the ability to remain relevant for the long term.
A market that's really big
Determining the size of an addressable market is based on a set of assumptions and estimates. Twilio published its own estimate when it acquired SendGrid in 2018. Let's dive into the details of this number.
|
Market |
Potential Market Size |
|---|---|
|
|
$11 billion |
|
Programmable authentication |
$2 billion |
|
Programmable voice and video |
$21 billion |
|
Programmable messaging |
$32 billion |
|
Total addressable market |
$66 billion |
Data source: Twilio.
From the table above, you can see that the company split its market into four segments. The email portion was the only number that was developed internally, while the programmable services were based on third-party estimates from IDC.
Image source: Getty Images.
Looking more closely at the email market, its size was based on three factors:
- The percentage of U.S. businesses that had an online presence in 2014 (53%).
- The number of companies globally with five or more employees.
- The average revenue per customer SendGrid and Twilio had for those services in 2016.
These were combined to generate the $11 billion potential. We won't cover the details of the other components, but you can see that there's a number of ways you could poke holes in this calculation. Even with these drawbacks, the important part for shareholders is that the company's trailing-12-month revenue of $1 billion is significantly smaller than the $66 billion total market, giving it plenty of room to grow.
With its market size being large enough to achieve growth of 10 times, let's look at the company's competitive advantage.
A disruptive approach is its advantage
CEO and founder Jeff Lawson describes the legacy process for building a communications platform to be "fragile, slow, and expensive." It required combining telecom hardware, networking equipment, custom applications, and integration experts to tie it all together. Once the network was up and running, the headaches were still just getting started -- maintenance and upgrades for this patchwork solution were an ongoing burden. Twilio cuts through all of this by providing access to its super network through an easy-to-use set of applications with its programmable communications cloud. Developers can download the software and build messaging prototypes for their companies in an afternoon.
This super network is the moat that gives Twilio a tremendous advantage against competitors. It has been built piece by piece since the early days of the company and now allows developers access to communications networks in 180 countries with "27 cloud data centers in nine geographically distinct regions." This network is smart, scalable, low cost, and provides incredible reach and reliability for its customers.
What's even better is that as its customer base grows, it strengthens this advantage and creates a sustainable moat. More volume allows the company to spread its costs out over more customers and provides more capital to invest in the network. Active customers reached 172,092 last quarter (including the SendGrid customers it acquired) compared to a year ago's number (without SendGrid) of 61,153.
The super network and its growing customer base provide a sizable competitive advantage, but in order to achieve millionaire-maker status, it also needs to be nimble.
Acquiring and innovating to remain relevant
Twilio is acquiring technologies to help build a moat around its platform and create sustainable growth. The company has purchased six companies, including Authy, which built a secure and scalable two-factor authentication platform, and SendGrid, which developed a comprehensive set of email communication tools. But acquisitions alone won't keep you relevant -- that requires innovation.
Two recent product announcements are examples of how its innovative mindset is helping it extend its platform into new markets: Twilio Flex helps companies start and run contact centers, and Twilio Programmable Wireless is a platform for developers to control Internet of Things (IoT) devices. These aren't contributing meaningful revenue yet, but they could be sizable growth opportunities for the future.
Twilio's innovative ability and smart acquisitions give it staying power for the long term.
Wrapping up, and a friendly reminder
Twilio checks all of the boxes that could help make it a ten-bagger in 20 years, but the future is far from certain. In order to achieve that kind of return for shareholders, it would need to reach a market capitalization of around $170 billion, similar to the size of software giants today. This communications platform company has what it takes to be on par with these software pioneers, but it's going to take time.
Note that the company releases its fourth-quarter and 2019 earnings on Feb. 5, after the market closes. Long-term shareholders know that regardless of the short-term stock movement resulting from this report, this upcoming checkpoint is only one of the 80 quarterly releases that will occur in the next 20 years.
