Twilio (TWLO 2.94%) put an exclamation mark at the end of 2019, finishing off the year well ahead of management's guidance and consensus Wall Street analyst expectations. It has now been a year since the completion of the big $3 billion SendGrid acquisition, and the stock has changed in price very little over that period of time, as I thought it might. However, Twilio's growth story looks promising, as evident in the initial guidance for 2020. It isn't as cheap as when I first bought it, but the time looks right to add to the position.
Data by YCharts.
The final touches on a great year
Twilio ended 2019 with over 179,000 active customer accounts, compared with over 140,000 between it and SendGrid at the time of takeover in February 2019. The company's dollar-based net expansion rate was up 136% in 2019, including 124% in the fourth quarter, implying existing customers spent 36% and 24% more than the year prior, respectively. New customers and existing relationship growth added up to a 75% increase in full-year revenue, or up 47% when excluding the contribution from SendGrid.
|
Metric |
12 Months Ended 12/31/19 |
12 Months Ended 12/31/18 |
Change |
|---|---|---|---|
|
Revenue |
$1.13 billion |
$650 million |
75% |
|
Adjusted gross profit margin |
58.3% |
54.8% |
3.5 pp |
|
Operating expenses |
$979 million |
$464 million |
111% |
|
Adjusted net income |
$22.2 million |
$11.5 million |
93% |
|
Adjusted net income per share |
$0.16 |
$0.11 |
45% |
Data source: Twilio. Pp = percentage point.
The 47% top-line increase when backing out SendGrid is a slowdown from the 77% growth rate posted in 2018, but business is still healthy and has plenty of room to expand. Case in point: Twilio's top brass told investors to expect a 44% to 45% increase in revenue in the first quarter of 2020 (which gets a slight bump from SendGrid, as the first month of the quarter is still lapping the first month of 2019 before the takeover), and a 30% to 31% increase in the top line for the full year. Management tends to guide conservatively, but either way the forecast is a rosy one.
One blight on the 2020 initial outlook was for a $50 million to $60 million adjusted operating loss, a reversal of the adjusted gains made in 2019. However, much of that has to do with the timing of new investments and growth initiatives at the beginning of the year (like Twilio Flex, the cloud-based contact center that will help big businesses transform their communications for the digital age), and a return to breakeven is expected by the fourth quarter of 2020. For investors in high-growth stocks like this one, though, heavy spending to maximize growth now is par for the course.
Image source: Getty Images.
A reasonable price for the future of communications
At the midpoint of 2020 revenue guidance, Twilio trades for 11.7 times sales. It's not as cheap as it was a few months ago when I first decided to pull the trigger and buy the stock, but given the growth potential I think it's a relatively reasonable price to pay.
Digital-based communications and cloud services are fast-growing industries, and Twilio has been able to consistently expand in its market. I like the combination of existing customers ramping up spending as the Twilio platform proves its worth and new customers being added at a rapid pace. The lack of bottom-line return will mean this stock remains a volatile one, but the long term looks promising for Twilio as the cloud industry continues to become more important. I'm a buyer after the Q4 2019 report, and any pullbacks in share price this year look like good opportunities to add to (or start) positions in this modern communications leader.
