Is Twilio Stock a Buy?

A year ago, I recommended Twilio (TWLO 2.93%) as a buy and since then the stock has rocketed over 260%. If you missed out on my recommendation, you might be wondering if it's too late to get in on this customer engagement platform. Short answer: You aren't. The company has made a number of smart moves this year to set itself up for continued growth long into the future.

Let's look at what's happened since last year and see why it's not too late for investors to get in on this stock.

TWLO data by YCharts. Stock price data from 12/23/2019 to 12/23/2020 for Twilio and the S&P500.

Twilio's business is growing fast

Twilio's application programming interfaces (APIs) that allow developers to create programmatic email, text, and voice communications have driven tremendous top-line growth. The company's revenue is made up mostly (77%) of usage-based revenue where customers pay a tiny fee for each message generated by the platform. The rest of the revenue is subscription-based revenue for enterprise offerings, support, or the number of seats for its contact center solution, Flex.

Data source: Twilio. Calculations by author. YOY = year over year. QOQ = quarter over quarter. 

Over the last four quarters, organic revenue growth has been equal to or exceeded 36% year-over-year growth, driven by strong customer acquisition rates and dollar-based net expansion. I've included the sequential customer increases in the table above to highlight organic growth instead of customers that were gained through acquisition. The most recent quarterly customer year-over-year organic growth is a solid 21%.

This momentum is expected to continue. Management indicated in its investor day presentation that it expects 30% year-over-year revenue growth for the next four years. That doesn't even include potential gains from its most recent acquisition.

Acquisitions are making its platform stronger

Its acquisition of SendGrid, the email communications platform, in 2018 for $3 billion was its largest purchase to date. As Twilio integrated the platforms and started to cross-sell its services, growth accelerated for the email tools. Before the acquisition, SendGrid was achieving 113% net dollar retention and 31% year-over-year growth. In the first half of 2020, the integrated email platform achieved an average 120% net dollar retention rate, and 36% year-over-year revenue growth. This was an impressive percentage point improvement for both metrics, which were already on solid footing.

In October, it announced the acquisition of Segment.io for $3.2 billion. It's too early to tell the results of the integration, but Segment's customer data platform filled a key gap in Twilio's customer engagement platform. The customer data platform business adds another $17 billion to the total addressable market and a massive opportunity for cross-selling. Look for these two acquisitions to continue to drive growth for the company in the years ahead.

Image source: Getty Images.

There are still plenty of ways to grow

In addition to Segment and SendGrid, Twilio has plenty of growth levers. Its high-end application services (contact centers, video, and messaging software) is growing faster than its overall business and has become a meaningful 12% of the total revenue. Its core business, messaging, has accelerated through the COVID-19 pandemic as businesses have pulled forward digital transformation plans. But it's not just products that are growing revenue.

Global 2000 customers have been a source of growth in the last few years, but still represent a huge opportunity. The company has 359 of the Global 2000 as customers (as of the second quarter of 2020), up 100 from the fourth quarter of 2017. But what's even more impressive is their spending has increased over 650% over the same timeframe. Yet the combined revenue from this key customer set only makes up about 5% of the top line. This leaves plenty of room to expand the footprint in these key accounts and add more of these large customers over the coming years. With the Segment acquisition in the books, Twilio's expanded product set is likely to appeal even more to these enterprise customers. 

Finally, as the company adds new customers to its roster, they tend to stay. Its sticky platform leads to high net dollar retention rates and low churn. Every new customer is a chance to build a long-standing relationship and bring more value to that business over time.

The bottom line for investors

Twilio's high-quality business doesn't come cheap. Since it's pouring all of its profits into growth initiatives, let's take a look at the price-to-sales ratio. Its PS ratio of 34 is priced at multiples to the S&P 500's average of 2.7, but is still cheaper than some of its software-as-a-service peers. Atlassian, Okta, and Zscaler all carry higher PS ratios of 35, 45, and 56 respectively.

I'll wrap up this year-end recommendation the same way I did last December: "With a world of opportunity ahead, Twilio is a buy today for a specific kind of investor. If you want a proven growth company with a huge addressable market, aren't concerned about short-term profitability, and are comfortable holding for the long term, you could do well by adding this communications software service leader to your portfolio."

It's unlikely that the stock will reward investors with triple-digit gains again in 2021, but this customer engagement platform will likely produce market-beating results for years to come. I look forward to touching base with you next year on Twilio's progress.