Even after a sell-off after its last quarterly report, Twilio (TWLO 1.08%) stock has returned an epic 190% so far this year. Digital transformation has accelerated during the pandemic, and Twilio is powering digital communications for its customers like never before.
To be sure, the most recent quarter only partially supports the sky-high valuation of nearly 26 times trailing-12-month revenue at which Twilio stock currently trades. But an upcoming acquisition and new product launches will help this company keep its lead in the still nascent cloud-based communications industry. Long-term shareholders have little to be concerned about.
Image source: Getty Images.
A great year for the top and bottom lines
With three quarters down and one to go in 2020, Twilio has seen a massive uptick in adoption of its cloud-based library of applications enabling everything from digitally embedded text to voice, video, and email. And Twilio remains close to breakeven (measured by free cash flow, revenue minus cash-only operating and capital expenses) as it reaches a greater scale; even as it continues to spend heavily to promote maximum expansion. Every new dollar is more valuable than the last as the tech company's infrastructure becomes more profitable with more users and developer activity.
|
Metric |
Nine Months Ended Sept. 30, 2020 |
Nine Months Ended Sept. 30, 2019 |
Change |
|---|---|---|---|
|
Revenue |
$1.21 billion |
$803 million |
51% |
|
Net income (loss) |
($312 million) |
($217 million) |
N/A |
|
Free cash flow |
($27.5 million) |
($33.8 million) |
N/A |
Data source: Twilio.
The $3 billion SendGrid acquisition completed in February 2019 is also still paying off, giving Twilio more to offer its customers. Net dollar-based expansion accelerated to 137% during Q3 (implying existing customers spent 37% more with Twilio than last year), nearly matching the 142% surge at the start of the pandemic as businesses scrambled to put continuity plans in place and tapped Twilio for help with that. And with $3.3 billion in cash and $433 million in convertible debt as of the end of September, Twilio is enviably funded to continue its fast pace of growth despite the red ink on the bottom line.
New innovation, both organic and acquired
As to specific plans, co-founder and CEO Jeff Lawson talked during the quarterly presentation about newly launched services. Twilio announced a new Flex ecosystem that includes over 30 integratable customer relationship management software solutions from partners like Alphabet's (NASDAQ: GOOGL)(NASDAQ: GOOG) Google, salesforce.com (NYSE: CRM), and Zendesk (NYSE: ZEN).
Video communications have also been in high demand this year, and to capitalize on the movement Twilio released a free version of its video service. Mobile app Frontline was also launched and is currently in beta testing, enabling employees without a desk to connect with customers on the go. And Microvisor, for quickly building "Internet of Things" connectivity networks, made its debut, too.
Most importantly, though, was the announced acquisition of Segment for $3.2 billion early in October. Nearly two years removed from purchasing SendGrid, this could be a big long-term game changer for Twilio, even though the Segment takeover is a relatively smaller move than SendGrid (since Twilio's current market cap sits at $43 billion versus just shy of $15 billion in early 2019). With all sorts of applications for its customers to utilize, Segment and its data silo-busting capabilities should enable a big jump forward, making Twilio not just a communications service, but a data suite that allows Twilio's users to better understand just which digital communications tools it should be building in the first place.
Since Segment is an all-stock deal, Twilio's balance sheet isn't going to get dented, although existing shareholders will get diluted from the purchase. But it should help support the long-term growth thesis. Twilio recently said it expects organic growth (excluding Segment and other possible takeovers down the road) to average 30% a year in the next four years. Though trading for a high premium and with other big tech companies catching on, this growth stock is still worth owning.
After the epic run this year, I expect share prices to hit some turbulence for a couple of quarters or so -- especially as Twilio begins to digest the Segment acquisition expected to close by the end of 2020. But long-term, this is still the cloud computing-based digital communications business to own.
