Please ensure Javascript is enabled for purposes of website accessibility

Why I Wasn't So Impressed With Twilio's Investor Day

By Billy Duberstein – Oct 7, 2020 at 7:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Twilio's stock surged after its Investor Day presentation, but I'm not sure why.

Shares of Twilio (TWLO 0.41%) 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 -0.04%) 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.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Microsoft and has the following options: short October 2020 $170 puts on Microsoft and short October 2020 $160 puts on Microsoft. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Microsoft and Twilio and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Twilio Stock Quote
Twilio
TWLO
$48.56 (0.41%) $0.20
Microsoft Stock Quote
Microsoft
MSFT
$247.49 (-0.04%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.