Twilio (TWLO 1.08%) recently announced record revenue and its largest acquisition ever. The company is executing well, and its stock has rocketed up over 150% since the beginning of the year. Does this customer engagement platform have more fuel left in the tank to propel it even higher? Let's look at five strategic moves that are positioning this software-as-a-service operator to have its best days still ahead.
1. It's expanding its addressable market
As part of its S-1 filing to go public, management estimated the addressable market for Twilio's products in 2017 to be $45 billion. Since then, it's added email as a result of its SendGrid acquisition and CCaaS (call center-as-a-service) as part of its app services offering. Between growth and these new offerings, its current addressable market has expanded to $62 billion.
Image source: Twilio investor day presentation -- October 2020. Note: UCaaS=unified communications as a service, CCaaS=call center as a service.
What's not shown on the image above is its latest purchase of Segment, the customer data platform, which adds an additional $17 billion of opportunity to 2020. Peter Reinhardt, Segment's co-founder and CEO, shared that its addressable market is growing at around 30% per year, which would put it at $37 billion by 2023.
Between Twilio's fast-growing segments and the customer data platform, its total addressable market could be a massive $124 billion by 2023. With trailing 12-month revenue of $1.5 billion, it's got plenty of runway to grow.
2. It's moving up the value chain
The company's bread and butter offerings are its text message services, but these are also some of the lowest-margin products it has. Over time, Twilio has built a robust set of higher-priced and higher-margin products it calls application services, such as Flex (its call center product), security (such as Authy's two-factor authentication), and voice and video conferencing.
A customer may not start out using these products, but having this broad set of offerings enables its customers to grow their footprint over time. Its application services now make up 12% of its 1H-2020revenue and are growing faster than its core business. As these products catch on, Twilio not only makes a better margin, it gets more revenue too.
3. It's getting value from its acquisitions
When Twilio purchased SendGrid, an email messaging platform, for an all-stock deal of $3 billion in the first quarter of 2019, it was its largest acquisition to date. Although it was a massive outlay, the company has demonstrated that it's received tremendous value from this transaction.
The growth of SendGrid's email service accelerated from 31% pre-acquisition to 36% in 1H-2020, and its dollar-based net expansion has improved from 113% to 119% in the second quarter. Additionally, SendGrid brought its 74,000 customersto the Twilio fold, which allowed for cross-selling of its core offerings. Today revenue from its email products is a solid 16% of the top line in 1H-2020.
With a history of technology and geography-based acquisitions and $3 billion in cash and marketable securities on its balance sheet, smart acquisitions are part of its growth strategy. Its recent announcement to acquire Segment is a great example of how this strategy will enable it to expand its opportunity and make its ecosystem even stronger.
Image source: Getty images.
4. It's embracing partners
In 2018, Twilio started its build partner program that links up with information technology service companies to help build and deploy the platform's communication services for customers. In September, it announced Deloitte Digital as its first premier Global Systems Integrator. This gives the software platform player another way to reach a global 2000 customers and demonstrate the value its tools can bring. This program is more than 300 strong today, and its partners have been part of 70% of the call center-as-a-service sales in 2020.
Today Twilio counts only 359 of its customers as part of the Global 2000, so this deal should help improve its reach into these valuable enterprise organizations in the coming years.
5. It's expanding its management team
With over 3,000 employees in 26 offices in 16 countries around the world, the company is becoming a much larger entity. It isn't a surprise to find out that it's expanding its C-suite with new positions. These new roles will help the management team cover more ground and enable its team to accomplish more. Roles that were added in 2020 include:
- Chief Diversity, Inclusion and Belonging Officer
- Chief Information Officer
- Chief People Officer
- Chief Security Officer
- Chief Customer Officer
The talented external hires that have filled these roles will bring their insights and experience to build a better Twilio.
The takeaway for investors
The company's stellar performance has attracted a premium valuation. Its 25 price-to-sales ratio isn't for the faint of heart, but I'd argue that the stock is cheaper than it looks. With its massive and growing market opportunity, talented management team, an ever-growing ecosystem of products, and smart acquisition strategy, this growth stock is one you'll want to buy and hold for the long term.
