Twilio (NYSE:TWLO) stock recently rose after the cloud platform provider agreed to buy Segment, a customer data platform, for $3.2 billion in stock. Twilio expects the acquisition, which should close in the fourth quarter, to expand its total addressable market from $62 billion to $79 billion.

Let's take a look at how Segment complements Twilio's business, how it widens its moat, and how Twilio could tap into the secular growth of silo-busting software companies across the enterprise market.

An illustration of cloud-based connections across the world.

Image source: Getty Images.

What does Segment do?

Companies often store their customer data across different software services and computing platforms. Those silos often make it difficult for companies to properly track their customers. Segment, which was founded in 2011, breaks down those silos by pulling all of that customer data onto a unified cloud-based SaaS (software as a service) platform.

The customer data platform (CDP) market is fragmented, but IDC ranked Segment as the top player in the market with a 9% share last year. It currently serves over 250,000 developers and more than 5,000 customers. Its total number of integrations with other software and services grew 37% to over 350 last year.

Segment's focus on shattering silos puts it on a similar page as Snowflake, which pulls a company's data from disparate sources and analyzes it, and Salesforce, which helps companies maintain customer relationships through cloud-based services.

Segment doesn't directly compete with either of those high-growth companies, but it still helps companies break down silos, streamline their operations, and migrate more of their data to the cloud. Those secular trends should continue for the foreseeable future.

Segment's revenue grew 88% to $180 million last year, according to cloud start-up tracker Latka, but it isn't profitable yet. By comparison, Twilio's revenue rose 75% to $1.13 billion last year. Those comparable growth rates suggest Twilio's takeover of Segment could boost its revenue by 15%-20% in 2021, but contribute nothing to Twilio's bottom line -- which will remain deep in the red.

Why does Twilio need Segment?

Twilio's core communication platform lets developers add integrated voice calls, text messages, emails, videos, and other services to their apps with a few lines of code. Outsourcing those features to Twilio's cloud service is simpler, cheaper, and faster than building them from scratch. Twilio's services also scale with an app as it expands its user base.

A woman uses a smartphone.

Image source: Getty Images.

Twilio enjoys a first-mover's advantage in this space, and it already serves prominent customers like Lyft, Twitter, and Airbnb. It also gobbled up smaller peers -- including the SMS provider BeepSend and the email service provider SendGrid -- to expand its ecosystem.

Those acquisitions extended Twilio's reach beyond its core communication APIs (application programming interfaces) and set the foundations for a more diversified cloud platform. They also kept its dollar-based net expansion rate, which gauges its revenue growth among existing customers, well above 100%.

However, Twilio still faces fierce competition from rivals like MessageBird, the European start-up that pulled Uber away from Twilio, as well as Vonage's Nexmo, Bandwidth, and Microsoft's new Azure Communications Service in the unified communications market. Therefore, Twilio needs to find new ways to expand its ecosystem and widen its moat -- and Segment fits the bill.

Twilio CEO Jeff Lawson believes the combination of Twilio's Customer Engagement Platform with Segment will "create more personalized, timely, and impactful engagement across customer service, marketing, analytics, product and sales" for its clients. In short, Segment's tools could lock in Twilio's customers, increase its net expansion rate, and differentiate its platform from those of its growing competitors. 

A smart long-term move

Twilio isn't spending any cash on Segment, which is prudent since it's still burning through lots of cash. The deal won't help Twilio narrow its losses anytime soon, but it should strengthen its platform and complement its other silo-busting services over the long term.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.