Shareholders of Twilio (TWLO +0.92%) stock enjoyed a 220% price gain in 2020 as the coronavirus accelerated corporate digital transformation plans. But if you think you've missed out on buying into this soaring stock, you'd be wrong. This customer engagement platform is well-positioned to post strong growth for many years to come.
Let's dive into the business and find out why it's my best cloud computing stock for 2021.
The business of a customer engagement platform
Twilio started as a way for software developers to create computer-generated messages through text and voice calls, but it has since expanded way beyond its original business. With a series of acquisitions and a culture of innovation, it's become a powerful customer engagement platform.
Image source: Getty Images.
The company now offers numerous tools for tapping into customer data and turning that information into actionable and timely communications. Whether it's video chat, email, text, or voice calls, Twilio's super network makes it easy for software developers to create value-added customer communications tied to an organization's existing legacy applications. Customers can even set up a full-featured contact center quickly, enabling enterprises to engage with their customers with a more personal touch.
This ever-expanding set of services has enabled it to grow its addressable market from $45 billion in 2017 to more than $79 billion today. But just having a large market isn't the only key to growth -- the company still needs to execute well, and it is.
Executing on its growth strategy
Twilio has numerous ways to grow: attracting new customers, expanding existing customers' spend, growing into new markets, and growing the use of its products. It is executing on all fronts. Over the last four quarters, top-line growth has been above 35% and it's posted an impressive set of dollar-based net expansion numbers.
|
Metric |
Q4 2019 |
Q1 2020 |
Q2 2020 |
Q3 2020 |
|---|---|---|---|---|
|
Revenue |
$331 million |
$365 million |
$401 million |
$448 million |
|
YOY organic growth |
36% |
57% |
46% |
52% |
|
Dollar-based net expansion (organic) |
125% |
135% |
132% |
137% |
Data source: Earnings presentations. YOY = year-over-year.
But there's still plenty of opportunity. International revenue is still a small fraction (27%) of the top line. Twilio's high-margin application services only account for 12% of revenue, and its services are still underpenetrated among Global 2000 customers as only 359 were using Twilio at the end of Q2 2020. Management is so confident in its future prospects that it's committed to forecasting 30% year-over-year top-line growth for each of the next four years. What's even more exciting for investors is that this doesn't even include the potential revenue from Twilio's recent acquisition of Segment, the customer data platform.
But even with a solid go-to-market program that's executing at a high level, the company has plenty of other things going for it that investors will find attractive.
But there's still more to like
Founder and CEO Jeff Lawson has led Twilio since it was started in 2008. Having a founder still involved in the business is a positive investor trait, but for me, I take that one step further. I like to see leaders surround themselves with talented people to run key parts of the organization. Lawson has done this. In fact, over the past year, he's hired five C-suite employees who bring a critical outside perspective to a company that's trying to scale to the next level.
For tech investors, Twilio's developer-centric approach should be appealing. The company courts software developers by allowing them to download a free trial with access to the entire platform. With all the documentation and capability at their fingertips, developers are able to quickly create prototype messaging apps to demonstrate the value of the software. Even after the free trial is over, Twilio's usage-based model encourages experimentation with a low cost for each message. As developers try new features, organizations can test and learn what resonates best with customers. This developer-focused model has been a highly effective tool to drive growth.
Lastly, the company has a strong balance sheet with $3.2 billion in cash and marketable securities. This enables it to continue to run at a loss as it invests its profits in growth initiatives.
The bottom line for investors
Twilio's trailing-12-month revenue of $1.5 billion is a small fraction of its $79 billion addressable market. With its effective go-to-market engine and a robust set of applications, it will continue to attract software developers and grow revenue. Even with the market pricing this category leader at a lofty price-to-sales ratio of 30, Twilio is worth it.
It's important to understand that I'm not just writing about this stock -- it's one of my largest stock holdings at 6% of my portfolio. If you aren't a shareholder yet, you should consider joining me. The best days are still ahead for this cloud computing stock.
