In this episode of Industry Focus: Tech, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to explore Shopify's (NYSE:SHOP) growth acceleration, Palantir's (NYSE:PLTR) commercial efforts paying off, and Twilio's (NYSE:TWLO) rising cash hoard. There's lots of reasons to put them on your watchlist, as we do as well.

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This video was recorded on Feb. 19, 2021.

Dylan Lewis: It's Friday, Feb. 19, and we're talking about some of the biggest tech earnings reports of the week. I'm your host, Dylan Lewis, I'm joined by fool.com's almost always actionable analyst of asymmetrical asset advancement, Brian Feroldi. Brian how are you doing?

Brian Feroldi: Dylan, happy Friday to you!

Lewis: Happy Friday. I think that's the attitude you got to have on a Friday. Heading into the weekend, you got some snow. We would appear to have been snowed for about four minutes [Laughs] down in DC. I think that's a nice cheery way to head into the weekend.

Feroldi: This is the end of vacation week for us up in [...] and by vacation week, it basically means your kids are home instead of going to school. I am looking forward to getting back into the swing of things next week, and sending them back to school.

Lewis: Yes. Their vacation ends and yours begins, basically. [Laughs]

Feroldi: That's exactly the way you can look at it, Dylan.

Lewis: We're going to be tackling earnings on today's shows. No shortage of interesting earnings reports to dive into. A lot of companies reported over the last couple of weeks. In particular, we're going to be focusing on three companies that are favorites in the Fool community, owned by a lot of Fools. That's Palantir, Shopify, and Twilio. Brian, let's start with one that probably people are at least familiar with, the newest to the public market, and that's Palantir.

Feroldi: Palantir, this is ticker symbol PLTR. We've done an S-1 show on it and we did another show where we talked about it. This one has really caught fire in the investment community. It's been a big time winner since coming public, and Palantir is a software company that's primarily focused on big data and big data analytics. They initially were focused on government. That's where they got their foothold. More recently, they've been taking their core technology, which has security built right into it, and they've been applying that and trying to move that technology into the private sector. The results that we've seen from this company basically proved that that strategy is working. In the fourth quarter, this company reported 40% revenue growth to $322 million. That came in about $20 million ahead of Wall Street's estimates. The rest of the income statement looked pretty good too, gross margin ticked up 1,100 basis points to 78%. Boy, is that a healthy number. The bottom line wasn't as pretty on a GAAP basis. We saw $157 million in a net loss, that was bigger than expected. However, the entire net loss was basically just accounting; $242 million in stock-based compensation for the quarter. You back that out and the company was solidly profitable. The headline numbers for this company in the fourth quarter look good.

Lewis: That loss isn't anything unexpected, and when you drop that stock based compensation charge, I think it's impressive for a business that is this early on, it's been around for a while. But in terms of the growth ramp, this early on, to be basically profitable.

Feroldi: Yeah. The last couple of quarters, they have been profitable, at least on a non-GAAP basis. One of the reasons I think that this company went public, or one reason that companies do go public sometimes, it's not necessarily just about the funding, it's about raising their awareness within the business community; and Palantir, you can make the argument, has done just that. In the fourth quarter alone, they noted that they had several new contract wins with big name companies like Rio Tinto, PG&E, the U.S. Army, the U.S. Air Force, the FDA , and the U.K.'s National Health Service. They mentioned that in the quarter they signed 21 contracts that were worth $5 million or more and 12 contracts that were worth $10 million and more. This company is going to report a lumpy revenue growth from quarter-to-quarter, given that these contracts do matter so much, but I think you can make the argument that their coming public has helped them to win over customers.

Lewis: I think that's right. We talked about it when we did some of these earlier shows on the company, but there was a much longer sales cycle than what you would typically see in the Software-as-a-Service space. The easiest way to think about this business is halfway between the SaaS business and a defense contractor. If you can take the sales cycle from defense contractors and apply the business model of the SaaS company, that's going to get pretty close to what you have here with Palantir. For people that own the stock, they're probably pretty happy at this point, one, to see all those contracts coming in, because that future revenue, that's going to be flowing through to the business. But also to see so many wins in the commercial space.

Feroldi: Yeah.

Lewis: Because I think that's really a huge part of the thesis for this company.

Feroldi: To me, it's a relatively easy sales process to say, well, all these government agencies trust us with their data. If you care about data and security, shouldn't you trust us too? They are really winning, basically everywhere that they go. Importantly, they noted that they are winning within their existing customer base. They don't report DBNR or DBNE, but they did say that the average revenue per customer was $7.9 million. That was up 41% year-over-year. They reported the average revenue from their top 20 customers was $33 million. That was up 34% year-over-year. A big thesis for this business is land and expand and boy, they are doing just that.

Lewis: Yeah. The number that really stuck out to me is, they did about $480 million in revenue from their commercial customers in 2020. That was just under half revenues, about 44%. In 2020, the year-over-year growth rate was 107% from their U.S. commercial customers. Very quickly, the story for this company, if that continues, is going to be, hey, this is a great business commercially, that also happens to have government contracts rather than what we know it to be today.

Feroldi: That's a big reason why we've seen the stock do as well as it has. It's up over 150% since their IPO, just a few months ago. The company had a couple of big announcements recently, that I think can help to continue that strong growth. They announced a new partnership with IBM, where IBM will resell their foundry modules as part of their cloud offering. They noted in the call that IBM's salesforce on this product is bigger than the entire employee base at Palantir. That multiplies the company's salesforce, just that one deal, by many fold. The company also announced a collaboration with a law firm named Akin Gump Strauss Hauer & Feld. They basically said that they're going to take their Palantir foundry software and apply some unique innovation solutions that meet the needs of legal professionals. The company is making a lot of moves behind the scene that, to your point, should help this company continue to win over commercial customers.

Lewis: The funny thing is, Brian, the government business is doing just fine too. It's not like that part of the company is slouching at all. Looking at the earnings slides, just over $600 million in revenue from that segment. Just a little bit more than half and 77% revenue growth from our government customers in 2020. That business is firing on all cylinders as well. It just happens to be out shot a little bit by what we're seeing on the commercial side. I factor all that to be a really good first-class problem to have if you're a business.

Feroldi: Absolutely. Management came out and they gave some pretty bullish guidance that really caught investors attention. For the first quarter of 2021, they're currently forecasting revenue growth of 45%. Expect to keep that really strong. They said that they're going to add triple-digit headcount to their salesforce over the next year, so they are making big-time investments there. They actually came out and said, we're actually providing long-term guidance. We expect to grow our revenue by 30% annually over the next five years, which they're on record saying, we expect greater than $4 billion in revenue by 2025. That is the management team expressing some serious confidence in their business.

Lewis: [laugh] I was going to try to do some quick back-of-the-envelope math, and honestly, my Excel skills weren't quite fast enough, Brian. But to contextualize that 30% annualized over five-years, if you're growing at about 26%, 27% per year, that's a double in three-years. They're trying to grow faster and they're trying to do it for a longer period of time. Whatever that math shakes out to, I'm sure someone's doing it as we're saying this right now, it winds up being pretty darn impressive.

Feroldi: Yes. If they can execute on that, it is understandable why investors have bid up the stock so much and it's not hard to believe that this company can keep on winning.

Lewis: Yeah. When you combine the numbers with the excellent pedigree of the management team, the backing, and all of the cache that comes with that, there is a lot to like with this business.

Feroldi: Certainly is.

Lewis: A lot to like with this other business we're going to talk about though, Brian, I've got to say, and there are some interesting similarities with the way the guidance is being talked about. The second company we're going to talk about is Shopify. This is in some ways the company that needs no introduction to our Fool community. Fools know it well and have probably enjoyed some stellar returns if they've owned it. This is the e-commerce platform for small- and medium-sized businesses, increasingly being a provider on the brand and enterprise side as well with some pretty big names. But I try to think of the best way to summarize their earnings, Brian, and I came up with "wow, just wow." I think that's about as good as I can frame it.

Feroldi: Fair enough, and you did the work here, so prove it to me. [laugh] What is this "wow, just wow" you're talking about Dylan?

Lewis: Full year 2020 results. Revenue was just under $3 billion, which is good for 86% year-over-year growth. You'd have to go back to 2016 to find a better year-over-year growth rate for the company, so just on that alone, really impressive top-line growth, big acceleration. In 2019, they were looking at 47% year-over-year growth. They benefited tremendously from the pivot to e-commerce and to digital. There were already a lot of tailwinds pushing them forward. I can't say that anyone was surprised to see really [...] growth rates and accelerations from this business, but seeing those numbers in particular, it really paints the picture.

Feroldi: That's incredible. Back in 2016, as you pointed out, this business was a fraction of the size that it is today, and even back then, there were still questions about who's going to win this space and what about Amazon. To see them put up that revenue growth four years later is just incredible.

Lewis: It is. When you scale dramatically, there are some interesting things that can happen with your financials, and we saw that a little bit. Gross margins wound up taking a hit for them, down to about 52%. They've typically been somewhere in the mid 50s, and I think as problems go, that's a fine one to have because they had tremendous growth. If you look at some of the company specific numbers, some adjusted numbers they give, it does change the story a little bit and they do appear to be enjoying operating leverage. On an adjusted basis, if you look at the adjusted numbers they're using for R&D, SG&A, marketing, and transaction losses, with a grain of salt, their costs went from about 53% of revenue in 2019 down to 39%. The key there is, you are excluding stock-based comp, payroll taxes and some amortization of acquired intangibles. Depending on how you want to look at things, the scale is benefiting them or they're taking a little bit of a pinch on the scale that they're enjoying. Either way though, I think it's OK for their gross margins to compress down just a little bit.

Feroldi: That's going to be something that's gonna be interesting to watch over the next couple of years because Shopify has been investing so aggressively in itself through hiring, through launching new business opportunities. That's one of the reasons that I think that I love it so much, this business has an incredible amount of optionality into it. I'm OK with margin compression on the topline. I wonder where that's going to head in the long term.

Lewis: You know, Brian, despite that heavy investment, they still manage to post positive operating income. I think this company, particularly because of how long-term oriented they are, they don't have any problem throwing cash at things that they know are going to be good long-term growth drivers in spite of that. They're not pulling any punches when it comes to their SG&A spend, their R&D spend. The revenue growth just was so impressive in 2020 that they were able to, for the first time, report positive operating income. Between that and some sales on investments that they had, the company logged positive full year net income for the first time. Which is darn impressive, because I don't think that's really what they're trying to do right now.

Feroldi: No, there's no doubt about that, and when you're putting up that kind of incredible 86% year-over-year growth on the top line, you should not want this company to be focused on profitability at all. You should say reinvest, reinvest, reinvest. The more I read these company's numbers, the more I just think, this is the 2010s version of exactly what happened to Amazon when it became public. You are seeing just unbelievable topline growth. You're seeing margins that are all over the map. But the fact that they have gotten to operating profitability this early is really exciting.

Lewis: It is. The numbers are truly staggering. We've talked about it before, but this is a business that succeeds when its customers succeed. They've intentionally built that into their billing and their approach to how they handle themselves. The numbers are just bunkers for 2020. A new business on Shopify made their first sale every 28 seconds on average in 2020, which is simply astonishing. They wind up with 1.7 million merchants at year-end. If you're looking on the higher-end of their services and their offerings, Shopify+, which is their larger brand solution, had over 3,000 merchants join, bringing their total to 10,000. Those are super valuable accounts for them. To see that growth is really impressive.

Feroldi: It's crazy to think that they are doing just that and those numbers just prove that this company is executing brilliantly against its long-term plan. It is one stock that I have owned and seen over the last couple of years that just proves how hard it is to value companies and how hard it can be to say, "This company is overvalued. I'm going to either trim my position or not buy." It's Shopify. This company trades at a nosebleed valuation and continues to prove that it's undervalued.

Lewis: I know. Prior to being a shareholder, every time I thought about buying, I looked at it and I was like, "I don't know if this makes sense." Yeah, I finally took the plunge a couple of years ago, glad I did. Winded buying it a couple of more times as well. I think a lot of Fools are probably in the same boat. The numbers have been impressive. I think what's amazing is, we're seeing high growth, Brian. But if you take a step back and look at where they stack up in U.S. retail e-commerce, it's wild. By their own math, they came in second in U.S. retail e-commerce in 2020, behind only Amazon. They had 9% market share, which is more than Walmart, and more than, I believe, Apple, Home Depot, Etsy and Wayfair combined or about the same size.

Feroldi: How is that for a stat? [laugh] They are No. 2, ahead of Walmart, which is no slouch on its own. Walmart.com has been growing like crazy, and they have been throwing their tons of capital into that. I think you are right. The takeaway is wow.

Lewis: Absolutely wow, yeah. Normally, I am frankly a little loath to spend time with a long quote on the podcast. I don't know that it makes for great listening. I do think it's worthwhile here, and I'm going to pull something from Shopify's conference call. Management said, "As many of you who have followed us for years know, we've always prioritized long-term value over short-term financial opportunities because we don't manage our business to achieve short-term discrete financial results. We are replacing quarterly and annual numeric ranges with information on directional indicators, the primary leverage driving our financials and the assumptions that guide our planning." I think that really says it all about the way that management works at this business, what you are getting when you are buying into this business, and what you have to expect. I have to imagine at some point, for as staggering as it's all been, there will be some rough periods. There have to be at some point, right, Brian? It's the story with every growth stock. But they are taking a five-, 10-, 20-year look with everything they are doing. You talked about optionality before, there's so much of it, and if you spend any time looking at their conference call, you realize that for as big as they are, there are so many different places that they can grow.

Feroldi: A quote like that just proves to me that Tobi Lutke, the CEO and founder of Shopify, is exactly the person that I want to put the capital on, and given the performance that he has put up, and given the growth that he has consistently done , I think that Wall Street is allowing him to operate the business like that. He has earned that credibility right.

Lewis: He totally has. They have so many interesting markets that they're starting to dip their toes into, and it all plays into the network that they're trying to build, and the brand that they are trying to build. You see investments in payment solutions, you see investments in more curated marketplace options, you see investments in capital options. There are so many adjacent businesses that they are able to hop into because they've become the storefront, they've become the presence for so many players. Once you have that layering in all these other things just make sense and it makes you more valuable as a provider.

Feroldi: That's why I think that's one of the many reasons why this company is so hard to value. They have so many growth irons in the fire and they are continually trying to open up new opportunities for them. Trying to guess what scale those things are going to achieve down the road is just incredibly hard.

Lewis: Yeah. That's where you can be a value investor even if you're a growth investor, right, Brian? [laugh]

Feroldi: That's exactly right.

Lewis: All right, we're going to talk about one more company, and that is Twilio, ticker TWLO. Another one Fools probably know pretty well. For the folks that don't, the developer building block company.

Feroldi: Yeah. This is a hard company to really contextualize what they do. The easiest way to describe them is they are a Software-as-a-Service company that provides communication tools for software developers. If you want to build in any type of communication into an app that you are building, Twilio makes drag and drop tools that you can put in that enable you to send voice, video, emails, et cetera. They are a software company that is built for developers, by developers.

Lewis: We've seen those types of businesses can be very successful. When you delight customers, particularly ones you tend to be under served or may be ignored in the product and decision process traditionally, you bring something really good to them, you wind up with a really strong product. Management at this company is developer first. It's a huge part of the way that they look at products and they really do everything.

Feroldi: They really do. This company has been growing like gangbusters since it came public. It has become a Wall Street darling and we saw why in the fourth quarter, because they put up not Shopify growth, but in that direction. In the fourth quarter, the company reported 65% revenue growth to $548 million. That's an impressive number on its own, but management actually called out that their adjusted growth rate was 52%. They said that they had some extra revenue from political revenue, as well as they made an acquisition mid-quarter that also bumped up their reported revenue growth. I really like what management was calling about. Hey, it was really, really strong, but it was slightly less awesome. That's great that they do that. But still, 65% revenue growth. Huge, amazing to see at this stage of the game. We did see some compression on growth margins even with that scale. Non-GAAP gross margin ticked down to 56%. That's about where it's been for the last couple of years, so nothing too bad there. The bottom line continues to be pretty ugly, especially on a GAAP basis, $179 million in GAAP net losses. However, on an adjusted basis, we saw $6.5 million in non-GAAP net income or $0.04 per share. The number that we love to look at with SaaS companies is DBNR, dollar-based net expansion rate. Twilio has always put up good numbers here and they did so again. This number was 139% for the quarter, really strong results all around.

Lewis: Super strong results. That expansion number, it is not the primo number, we'd rather see the retention number. But if you stack that expansion rate out there in the SaaS landscape, there aren't going to be too many companies to top it.

Feroldi: That's exactly right. Not only are they expanding within their existing customer base, but they are continuing to add just an incredible amount of customers in total. Last year, they ended 2019 with 179,000 total customers. They ended 2020 with 221,000 total customers; adding on 40,000 new customers in one year just shows how much love they have among the development community. Also important with noting that their top 10 customers makeup about 13% of total revenue. Investors had big problems with Twilio a few years ago when a certain company named Uber was an outsized customer for them and decided to switch. That made the company's growth rates go down. So, I do like that they're reporting that number and it continues to trend in the right direction.

Lewis: Yeah. Long, long before it was a stock market darling and about an eighth of the size that it currently is, Brian, they sold off about, I think, 40% after one earnings report, and it was because there was some speculation that they were going to be losing one of their biggest customers, or that there was going to be a reduction in the income or the revenue coming in from one of their biggest customers being Uber. It is great to see them diversified away from it. Deep, deep in these six figures customer count helps with that for sure. But I think also, just having deeper relationships with the big customers that you have, making that pie get split up a couple more ways, does wonderful things for you as a business. Amazing, though, to think about how far this company has come, from being so reliant on one customer to now being so spread out.

Feroldi: That's exactly right. The number for the full year looked pretty darn good too. For 2020, we saw 55% top line growth to $1.76 billion. The full-year DBN expansion rate was 137%. GAAP net loss for the full year was ugly, as you would expect, almost -$490 million. On an adjusted basis, it was positive $36 billion. Interesting to note, this company ended the year with about $3 billion in cash, and just after the quarter ended, they decided to add another $1.5 billion to that total through a common stock offering. They sold some stock at $443. I think that that's probably a good time to raise capital. But still interesting that they chose to do that when they had plenty of cash in the balance sheet.

Lewis: Yeah, it makes you wonder if they're gearing up for something. The conditions are right for it. If you can go out there and sell capital or sell equity in the business and raise serious capital at an attractive valuation, it totally makes sense too. When you start stockpiling like that, though, it does start to raise some questions, if they're going to go out there and buy something.

Feroldi: That would be really interesting if they did, because in November they closed on an acquisition of a company called Segment, which is "leading customer data platform that provides standardized data collection tool kits and helps to unify user records, route customers, data, and into any system where it's needed." Segment reported over 20,000 customers on its own, including some big names like Intuit, Fox, Instacart, and Levi's. Again, that acquisition closed in the middle of December. Twilio has a history of going out and acquiring complementary businesses to drive its growth. To your point, it will be interesting to see if they use some of that capital to do that just again.

Lewis: If they do, I think we're going to get continued emphasis on that organic growth rate, right? [laughs]

Feroldi: As long as they break that out. [laughs]

Lewis: It's the thing you always look for with the acquisitive businesses. Looking forward, what can folks expect from Twilio? Of all the companies we've talked about, they are the only one I think that provided firm [laughs] financial guidance.

Feroldi: Yeah. For the first quarter, they basically think that their revenue growth is going to remain really strong, so they're calling for revenue somewhere around $530 million, which includes the inclusion of Segment. That's good for about 46% year-over-year growth. Like many high-quality companies, we see this company consistently give conservative guidance, so I think investors are reading between the lines and assuming that they are going to report another quarter of, say, 50% revenue growth or so. The bottom line, they expect to report a non-GAAP net loss from operations of about $20 million to $15 million. As we noted off top, they have plenty of cash in the balance sheet if they want to continue to invest, invest, invest. Investors really like this report, which makes sense given the big growth on the top line as well as the pretty bullish guidance going forward.

Lewis: There's so much to like with really all these businesses that we talked about. I will say, I like generally, the pacing of management from Twilio, the way that they dive into the numbers, the nuance that they provide. A big turning point for me was really learning more and more about their CEO, Jeff Lawson. I will put in a shameless plug. We aired an interview that David Gardner did with Twilio CEO, Jeff Lawson on Industry Focus. I believe it was our February 5th episode, so about two weeks ago. That was a Motley Fool Live original, our members only live stream but we ended up releasing it to the public as well. If any of this discussion piques your interest in Twilio and you want to know more, really, really interesting executive, great management philosophy. The business is great but it's really nice when you really, really like the management team too.

Feroldi: He's another one, just like Tobi Lutke, that once you weren't about him and his ethos, he's all about the long-term. He's truly about developers, he clearly loves what he's doing, and man, is he putting up the results to prove why his stock should continue to go up.

Lewis: Yeah. That's the big thing, right, Brian? You say it all the time like, "Show me you can do it and I'll believe you can do it." All of these businesses so far, pounds here a little bit earlier on in the story, but all of them so far have put up some incredible numbers. It's easy to trust management teams that do that.

Feroldi: That's exactly right. We've seen these three reports. Which one impressed you the most, Dylan?

Lewis: Oh, man. It's hard. I am a little biased because I own Shopify and Twilio. I will say, Shopify is tough to beat with what they put up with numbers. I think this is a really strong report from Palantir. I think some of the dynamics here remind me a little bit of MercadoLibre and their payments platform where it started out as one thing and became another as growth just ticked up so much in their offline payments. In this case with Palantir, the non-government contracts really starting to stack up and the revenue there, starting to add up quickly, that's going to become a big part of a pie pretty soon, and that could be a thesis maker for the stock. I think one where, I don't own it, but it's moving higher and higher on my watchlist because of that. What about you?

Feroldi: I'm in the same boat as you. I am a shareholder of Twilio, I am a shareholder of Shopify, my bottom line on both of those ports is excellent. But like you, I think that I had lower expectations for Palantir once we dug into the S-1, and man, are they blowing those out of the water. It's really impressive what they've done to go from "Hey, we're [laughs] primarily a government company," to "Hey, anybody can work with us and use us." They are really winning, they are really executing. Like you, they are also climbing my watchlist.

Lewis: As we say often, Brian, there's nothing wrong with just buying them all. [laughs] As it turns out, we both might be in that position sometime soon.

Feroldi: Yeah, that's exactly right. [laughs] There's nothing wrong with tucking away shares of all three of these companies in your portfolio.

Lewis: Brian, thanks so much for joining me, as always.

Feroldi: Thanks for having me, Dylan. Have a great weekend.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey," shoot us an email at industryfocus@fool.com, or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show, The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.