Generally speaking, organizations that hope to remain relevant need to keep pace with technology. Cutting-edge software and cloud services can drive efficiency, boost productivity, and even improve the customer experience, all of which can increase profitability. But digital transformation (DX) doesn't come cheap.
Businesses will spend an estimated $9.1 trillion on DX initiatives between 2022 and 2025, according to the International Data Corp. (IDC). That trend creates a tremendous opportunity for investors, and companies like Twilio (TWLO 0.71%) and EPAM Systems (EPAM 2.77%) are well-positioned to benefit.
Here's what you should know.
Image source: Getty Images.
1. Twilio
Good communication is an important part of the customer experience. With timely text alerts, a targeted marketing campaign, or emails aimed at driving loyalty, businesses that effectively engage consumers have an advantage. Cloud communications specialist Twilio can help.
At the core of its platform is the Super Network, the infrastructure that connects legacy telecom networks and the internet. Using that foundation, developers can easily build applications with features like text messaging, voice, or video. Alternatively, Twilio provides a range of pre-built solutions, including Twilio Flex for cloud contact centers, Twilio Frontline for sales agent productivity, and Twilio Engage for artificial-intelligence-powered marketing.
As a whole, the company's broad portfolio differentiates it from rivals. In fact, the IDC recently recognized Twilio as the leading cloud communications platform, citing a greater range of capabilities and a better growth strategy. Not surprisingly, that value proposition has generated significant demand. Twilio has over 250,000 customers, and its expansion rate has remained above 130% in 14 of the last 15 quarters, meaning the average customer is spending more over time.
That dynamic has translated into rapid revenue growth.
|
Metric |
Q3 2018 (TTM) |
Q3 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$561.0 million |
$2.5 billion |
66% |
Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.
As a caveat, Twilio generated a negative free cash flow of $88 million over the past 12 months. Investors should pay attention to this metric, but I'm not too concerned. Twilio has $5.3 billion in cash and short-term investments on its balance sheet, but just $986 million in long-term debt. In other words, it has plenty of cash to burn while its business scales up.
On that note, management puts its addressable market at $87 billion by 2023, leaving plenty of room for future growth. As more organizations prioritize effective customer engagement, the breadth of Twilio's platform should help the company win more customers and capitalize on its massive opportunity. That's why this stock looks unstoppable in the long run.
2. EPAM Systems
There's always a new product that promises to reduce costs, increase output, and deliver a better experience for customers and employees. Unfortunately, finding and deploying those products is typically complicated and time-consuming. That's where EPAM Systems can help. The company specializes in IT consulting and product engineering, helping organizations identify problems, implement solutions, and optimize business processes.
One of EPAM's greatest assets is its scale. It employs over 47,000 engineers, designers, and consultants in more than 40 countries. That global pool of talent offers expertise in a number of technologies, from cloud computing and cybersecurity to artificial intelligence and virtual reality. Moreover, EPAM partners with software vendors like ServiceNow and cloud service providers like Amazon to extend its portfolio, leveraging best-in-class technologies to accelerate digital transformation for its clients.
Over the last three years, EPAM has delivered industry-leading top-line growth, alongside an impressive performance on the bottom line.
|
Metric |
Q3 2018 (TTM) |
Q3 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$1.7 billion |
$3.4 billion |
25% |
|
Free cash flow |
$200.0 million |
$373.8 million |
23% |
Source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.
Last year, EPAM reported a voluntary attrition rate of 10.8%, down from 13.3% in 2019 and 14.8% in 2018. All three of those figures are solid for a consulting firm, indicating that very few clients choose to leave. But the downward trend is even more noteworthy, as it implies that EPAM's services are becoming increasingly valuable.
Going forward, investors should expect that trend to continue. Management puts its addressable market at $150 billion, and EPAM's expertise in emerging technologies should help it capitalize on that opportunity. That's why this stock looks like a long-term winner.
