Shareholders and employees of communications software company Twilio (TWLO -2.19%) have had a rough go; the stock is down 85% from its high. A low share price displeases investors and employees relying on stock-based compensation.
So, what's happening? Twilio's decline has much to do with the bear market of 2022, but the company's also unprofitable despite being public for nearly seven years. A company must make money at some point, or Wall Street will question the business.
I don't blame anyone for questioning Twilio's merits as a worthy investment; it's been a rough ride in recent quarters. Strong management can get a company through rough stretches, and here is why Twilio's leadership can do the same.
Twilio's rich in knowledge and culture
Twilio is a cloud-based platform for communications software; developers can use the company's application programming interfaces (APIs) to build communications features into their apps or websites. For example, Salesforce.com hosted a conference of more than 19,000 people and instantly tallied survey votes and feedback using Twilio's messaging API. Twilio has more than 290,000 active customer accounts today.
Who better to lead a company than the founder? Studies have shown that stocks of founder-led companies often outperform those led by non-founders. CEO Jeff Lawson co-founded Twilio in 2008. Starting a business amid the Great Recession and growing it to nearly $4 billion in annual revenue is no small feat.
Additionally, management teams must build strong cultures that attract talented employees and retain them in an industry where poaching talent is typical. Websites like Glassdoor let employees leave anonymous reviews of the company and CEO. Twilio scores well on Glassdoor; nearly eight out of ten people would recommend working at Twilio, and Jeff Lawson has an 84% approval rating from employees.
In other words, Twilio has a CEO that's not only built an idea into a multibillion dollar enterprise but has also created a company that people want to work for.
Savvy decision-making benefits shareholders
Managing capital is an underrated part of leading a company; Twilio has made some timely decisions that have potentially saved shareholders a lot of pain. Stocks were going wild in 2020 and 2021, and Twilio's management took advantage of that by issuing shares at high stock prices to raise capital. Twilio wasn't low on cash but recognized that it could raise more money with fewer shares.
Had management not raised money when it did, it would have had to issue many times more shares at today's share price to raise the same amount of cash it raised between 2020 and 2021.
Management has also adjusted to changes in the company; growth has slowed, and Twilio is cutting back on spending and stock-based compensation to combat that. Time will tell how these changes work, but management has proven to be proactive. Under this new structure, Twilio can better invest in new products like Segment, Flex, and Engage.
Is profitability coming soon?
You might scan the internet and find some analysts criticizing Twilio for being unprofitable despite being in business for 15 years. That's a fair complaint, but investors might soon get the bottom-line improvement they're hoping for. As recently as Q4 earnings, management has repeatedly stated that the company will begin moving toward profitability.
Specifically, management is guiding for non-GAAP operating profit of $250 million to $350 million. That's not the same as a positive generally accepted accounting principles (GAAP) net income, but you can see below that turning operating income positive would be a vast improvement. COO Khozema Shipchandler discussed how Twilio's communications business would be more profitable, but losses in Twilio's newer data and applications businesses would offset some of that.
TWLO Operating Income (TTM) data by YCharts.
Here's the bottom line: Twilio is working toward a green bottom line, which should take additional share offerings off the table given its strong cash position. Holding shares means you're taking a leap of faith that management can make the business profitable and will continue generating shareholder value over the coming years.
Given the string of savvy decisions and strong company culture, I think it's a leap of faith worth making.
