Twilio Is Soaring As Communications Migrate to the Cloud

Share prices of cloud-based communications pioneer Twilio (TWLO +0.92%) continued their run higher on Wednesday after the fourth-quarter 2020 earnings update was released. A 65% year-over-year increase in revenue during the final months of the year was responsible, as was a forecast for at least 44% growth in first-quarter 2021.

After a nearly 400% share price increase in the last year, this is undeniably an "expensive" stock. But the way we communicate is changing rapidly, and Twilio is enabling that change in a big way. This remains a top cloud computing buy despite the price tag.

Twilio earnings: A 2020 recap

Software, specifically of the cloud variety, became more important than ever last year. Developers are now a critical part of organizations as they navigate a new digital world and implement new operational standards. More than 10 million developers around the world are using Twilio's library of software to embed new means of communication within applications. The power of this huge force was apparent in the final months of the year, with revenue increasing 65% from last year to $548 million.

Image source: Getty Images.

Within the fourth quarter total, $23 million came from the Segment acquisition (on Nov. 2, 2020, when the takeover was completed -- more on that in a moment). The company's Flex programmable contact center was also a key driver of growth in the period. Q4 net dollar-based expansion was 139% (bringing the full-year metric up to 137%), implying existing users of Twilio spent 39% more than in Q4 2019.

In total, Twilio put up more than respectable numbers given its already massive size.

Data source: Twilio.  

Twilio is in the driver's seat for enabling cloud-based communications

Twilio CEO Jeff Lawson said it's becoming clear organizations have no plan to end their cloud communications investments even after the pandemic ends. Flexible contact with customers and within organizations themselves spanning text, chat, video conferencing, email, and voice is the future. It's efficient, it allows a company to make quick adjustments if operations get disrupted, and it's what people want these days. The most successful companies are realizing they also need to be software firms (regardless of how they actually make money) if they are to succeed. And Twilio is a top partner making it easier to unlock the power of software.

That was the reasoning behind the Segment acquisition -- which cost $3.2 billion in new Twilio stock. Segment is still operating on a stand-alone basis, but the customer data business is a real differentiator for Twilio as other companies (like Microsoft, for one) launch similar platforms to try to cash in on Twilio's early success. Adding Segment to the mix gives developers a way to better understand the people they're building a customer-facing application for. New joint products between Twilio and Segment will be announced later as the two complete their integration.  

But does the momentum Twilio is riding warrant paying over 41 times trailing 12-month sales? It's a hefty price-to-sales premium, to be sure, but not unusual for a high-growth technology name these days -- even if the tech firm (intentionally) operates at a loss to maximize growth. That's what the $3.04 billion in cash and equivalents sitting on the balance sheet is for (offset by only $302 million in convertible debt). Twilio has an enviable war chest it can deploy and lots of options at its disposal as it disrupts the status quo. Adding Segment to the mix is a case in point, creating a unified place for building apps and gaining insight on user experience.

Granted, paying up for Twilio (versus, say, its much smaller and less comprehensive peer Bandwidth) only makes sense if you plan on holding for the indefinite future. But if that's the plan, Twilio is the cloud communications leader for a reason. My long-term bullish outlook remains unchanged.