Digital transformation is reshaping the way enterprises engage with consumers. It's no longer sufficient to provide generic communications. Instead, enterprises need solutions that enable personalized interactions. That's what makes Twilio (TWLO 1.08%) so important.
This tech company specializes in communications. Twilio's share price has surged by more than 300% in the last year, fueled by the pandemic-driven shift to digitization. But there's still plenty of upside for investors. Here are three reasons why investing in Twilio stock could double your money.
1. Twilio has a big market opportunity
Twilio's platform makes it easy for developers to add communication functions like chat, text, voice, email, and video to their apps. This gives its clients the flexibility to engage their customers in a more personalized manner.
Image source: Getty Images
For example, financial services provider H&R Block uses Twilio to power the tool by which its employees can video conference with clients, simplifying the tax-filing process. Likewise, Shopify's contact center is powered by Twilio Flex, a customizable platform that supports intelligent call routing, messaging, and AI-powered chatbots, all of which translate into better customer service. And DoorDash uses Twilio's SMS tool to enable texting between dispatchers, drivers, and customers, providing anonymity while still keeping diners updated about where their food deliveries are.
As more enterprises replace older modes of communication with digital solutions, Twilio's total addressable market (TAM) should continue to expand. In fact, management expects the company's TAM to exceed $100 billion by 2023. For reference, Twilio's revenue over the last 12 months represents less than 2% of that figure.
2. Twilio is the market leader
Twilio pioneered the communications-platform-as-a-service (CPaaS) business model, and its success has brought competitors like Vonage to the space. However, Twilio remains the clear leader in terms of its platform's capabilities and market presence, especially among enterprise customers.
One of Twilio's greatest advantages is the number of developers using its platform. Developers are the creators of the software, the talented people who help enterprises differentiate themselves. And over 9 million developers use Twilio -- far more than the 1.2 million developers who use Vonage.
Think about it like this: Twilio owns the digital real estate, and developers build on its infrastructure. Because Twilio has more developers, its ecosystem can grow more quickly. And as developers surface new use cases, its platform will become still more valuable to other developers. That network effect should keep the company ahead of its rivals.
3. Twili wing quickly
As a core part of its growth strategy, Twilio has developed a strong partner ecosystem: Consulting firms like Deloitte Digital help clients build Twilio-powered solutions, and technology partners like Zendesk incorporate Twilio's functionality into their own platforms.
These partnerships, coupled with its best-in-class solution, have created strong demand. Since 2017, the number of active customer accounts has expanded from 49,000 to 221,000 -- that's a 65% annualized growth rate. And over that period, the company's net expansion rate has remained well above 100%. In fact, it reached 137% last year, meaning its average customer spent 37% more with Twilio in 2020 than they did in 2019.
The combination of an expanding customer base and increasing customer spend have created a compounding effect that's powered impressive top-line growth.
|
Metric |
2017 |
2020 |
CAGR |
|---|---|---|---|
|
Revenue |
$399 million |
$1.8 billion |
64% |
Source: Twilio SEC Filings. CAGR = compound annual growth rate.
Investors should note that Twilio's gross margin dropped from 54% to 52% over those years, primarily due to increased usage of its messaging platform. However, a slightly lower gross margin in exchange for more sales seems like a good tradeoff.
A final caveat
Twilio's bottom line is not currently profitable and the stock trades at a pricey 29 times sales. As is common among richly valued growth stocks, its share price has been volatile. In fact, the price is currently down 20% from its 52-week high.
So, for patient investors who can tolerate that type of volatility, now looks like a great time to buy a few shares. Twilio is a leader in a big market, and based on its strong past execution, this company has a bright future. That's why I believe this stock could double your money over the long term.
