What happened
Shares of Twilio (TWLO 0.26%) have surged today, up by 13% as of 11:30 a.m. EST, after getting a bullish initiation from Wall Street. Tech stocks are also enjoying a strong rally after selling off aggressively for weeks.
So what
Jefferies has initiated coverage on Twilio with a buy rating while assigning a price target of $415, which represents nearly 30% upside from yesterday's closing price. Analyst Samad Samana acknowledges that the communications technology specialist was "modestly profitable" last year but believes that it's justifiable for Twilio to invest in future growth at the expense of near-term profits. Twilio fetches premium valuation multiples, but Jefferies believes that the company's growth trajectory and ability to scale justify the high expectations.
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"Greater scale will also support long-term margin expansion, particularly since TWLO has an efficient S&M [sales and marketing] profile," Samana wrote in a research note to investors. "The company is targeting >20% operating margin in its LT [long-term] model."
Now what
Twilio continues to add new revenue streams that carry higher margins, such as voice, email, and app services. Those offerings carry a gross margin above 70%, compared to the core messaging service that has a gross margin of around 45%, according to Samana. Twilio's valuation multiples may be lofty, but they are still comparable to high-growth peers.
"We believe TWLO's uniqueness and dominance in a nascent, high-growth market justify a premium valuation," the analyst concludes.
