Shares of Twilio (TWLO 0.20%) surged last week after the company held its Investor Day conference. The event touted Twilio's impressive accomplishments to date, and also revealed that the company would exceed its revenue guidance for the recent quarter. That sent shares of Twilio up by as much as double digits after the conference on Oct. 1.

Color me confused as to the reaction.

A skeptical person in glasses stares back at a person in the foreground.

Image source: Getty Images.

Great work to date

No doubt, Twilio's accomplishments since its founding in 2008 and its initial public offering in 2016 have been impressive. Over the past 2 1/2 years, revenue has grown 3.5 times, active customers have quadrupled, and developer accounts have quintupled. Twilio has been able to maintain and even grow its net dollar expansion rate in that same time frame. Last quarter, the net expansion rate came in at 132%, meaning existing customers grew their spend by an impressive 32% over the prior-year quarter.

Of course, this is all looking into the past, and Twilio's stock has skyrocketed over that time. Since its IPO in June of 2016, Twilio's stock is up a massive 19 times its original $15 IPO price. While its growth to date is certainly impressive, it's not as if the market isn't recognizing it.

The windshield is murkier

Of course, buying or holding a stock now is a bet on a company's future versus its current valuation. In that respect, Twilio's longer-term forecast seemed a bit of a letdown to me.

Looking out over the next few years, Twilio expects a 30%-plus revenue growth rate for four years. That would be impressive considering Twilio already generated almost $1.4 billion in revenue over the past 12 months, which is terrific for a relatively young SaaS company. And over the "longer term" -- whenever that is -- the company expects adjusted (non-GAAP) gross margins between 60-65% and adjusted operating margins of 20%. However, with adjusted operating margins at just 2% today and 1% a year ago, it may take longer to get there.

Remember, adjusted figures neglect stock-based compensation, which is very high at Twilio. The company has already spent almost $150 million in stock-based compensation this year, up 15% from the prior year. Stock-based compensation is a real expense, and Twilio is still inking big losses today on an unadjusted basis. 

Assuming the company grows revenue 30% per year through 2024, achieves the high end of gross margin guidance at 65%, and grows operating expenses by just 20% (which would probably be optimistic), Twilio would probably make about $200 million to $300 million in operating profit in 2024, factoring in stock-based compensation.

Today, Twilio's market capitalization is about $42 billion, so today, investors are paying about 200 times operating profits in 2024.

Could that even be justified?

It's understandable for tech companies to invest like crazy to achieve long-term growth, but it's a bit unclear exactly how fast Twilio can grow beyond the 2024 time frame. The company says its total addressable market in 2020 is $62 billion, which appears to present quite a large opportunity; however, the company's current 2.4% market share suggests that there are plenty of others in the space already.

In fact, cloud giant Microsoft (MSFT 0.74%) just launched Azure Communications Services, which appears to be a Twilio competitor. That's a very large potential competitor to add to the mix of existing competitors out there, which may limit Twilio's overall market share opportunity or pricing power.

Basically, at a $42 billion market capitalization today and 200 times 2024 operating earnings at best, investors are pricing in a huge amount of good news for many, many years beyond that intermediate-term outlook -- and they're doing so in a technology market niche that's attracting large competitors. For that reason, Twilio's investor presentation made me a bit more skeptical of its current valuation, not less.

I'm not saying Twilio can't continue to go higher from here, and it's possible the company could outperform its own expectations and financial model. However, based on the current trajectory, it's hard to square with its current valuation, which, remember, is already up 19 times its IPO price just four years ago. Investors should tread carefully.