Twilio (NYSE:TWLO) has emerged as a top cloud computing investment. The stock has been a 10-bagger since its IPO in 2016 -- meaning it's produced a 1,000% return -- and is up over 220% just since the start of 2020. As of this writing, the company has a market cap of nearly $55 billion, making it one of the largest cloud software stocks around.
If you missed out on the first five-year run, it may not be too late to jump aboard the Twilio bandwagon. Shares carry a hefty premium even after a sell-off in March and April of this year, but secular growth trends could keep this company flying high for the foreseeable future.
From smartphones to communication on any device
Communicating is a basic human experience, one many of us perhaps took for granted before the pandemic kept us confined at home. Even so, keeping in touch with others has become incredibly easy thanks to the internet and social media. Smartphones also forever changed the way we communicate, putting a means to speak with others in our pockets at all times. Cloud computing is not only cementing those changes brought on by the internet and mobile networks, but it's also expanding on the way we can keep in touch.
Enter Twilio, one of those companies few people have heard of, but that many consumers utilize on a regular basis without even realizing it. The company owns an extensive library of cloud-based APIs (application programming interface), a set of tools used in software development to link together functions from other applications and services. Twilio's APIs allow developers to embed text and chat, email, voice, and video into an app. Its flagship service, Twilio Flex, is a customizable cloud-based contact center that helps businesses interact with their customers from virtually any medium imaginable.
Building on its flexible cloud-based communications platform, Twilio recently acquired Segment, a software firm that helps organizations collect and manage customer data. With the addition of Segment, Twilio won't just be an enabler of communications. It will also enable developers to predict and then build the best experiences possible by analyzing the way a company's customers want to stay engaged. 5G mobile networks are being promoted by mobile phone providers right now, but the cloud is really where it's at. Whether from a phone or a computer, Twilio is building a communications platform for the future.
The numbers tell an incredible story
It's clear Twilio is onto something great. Revenue in Q1 2021 was up 62% year over year to $590 million; $44.6 million came from Segment, so backing out that figure leaves 49% growth. What's really impressive is that this rate builds on top of the 57% growth the company reported in the same period a year ago. Twilio is pulling off this torrid pace of expansion by adding lots of new users (over 235,000 active accounts as of the end of March 2021, compared to 190,000 the year prior), as well as expanding its services with existing users. Twilio's net dollar-based expansion rate was 133% in Q1, implying existing customers spent 33% more with Twilio than the same time in 2020.
With remote work here to stay and cloud computing only growing in importance over time (tech researcher Gartner expects global spending on cloud software to grow by a double-digit percentage for the foreseeable future, reaching $400 billion per year by 2022), Twilio's solution for flexible communications platforms has years of expansion ahead of it.
Is the stock a buy?
Given the company's incredible momentum and the fact that cloud computing is a long-term growth trend, Twilio is most certainly worth considering. This is a high-growth firm that could be a central figure in the communications industry in a decade.
However, Twilio is currently valued under the assumption that its expansion will continue at a fast rate for a long time. Shares trade for 24 times trailing 12-month revenue, and though it's a very large software business, Twilio isn't profitable yet. This is partly by design, as the company is spending heavily to promote maximum growth now, but this strategy won't sit well with all investors. Free cash flow was negative $10.9 million in the first quarter.
Basically, this grow-first worry-about-profits-later operating model means Twilio can be a very volatile stock. Shares will wildly fluctuate in value based on the company's rate of expansion. For example, while the forecast for at least 47% year-over-year growth in Q2 2021 is nothing to sneeze at, it is a cool off from recent results. In response, Twilio's stock price sank as much as 40% from its all-time highs this past spring.
But this company can afford to spend its way to cloud communications dominance. It had $5.7 billion in cash and equivalents and only $1.2 billion in debt at the end of March 2021. Put another way, Twilio's negative free cash flow is of little concern given all the liquidity on hand. For those that don't mind the crazy ups and downs and are willing to hold for at least a few years (the longer the better), the high price tag on the stock isn't so unreasonable. After the spring sell-off, shares look like a solid long-term buy right now if you haven't bought Twilio yet, or want to add to an existing position.