When Twilio (TWLO 0.61%) went public in 2016, it initially impressed investors with the disruptive potential of its cloud-based services.
It allowed developers to easily add voice calls, text messages, and security verification tools to their apps by outsourcing those features to its cloud platform with just a few lines of code. Doing so was usually easier than building those features from scratch -- which could be buggy, time-consuming, and difficult to scale as an app gained more users. That's why companies like Airbnb and Lyft use Twilio to connect their customers to their hosts and drivers, respectively.
Twilio's first-mover advantage in this space, along with the expansion of the mobile app market, boosted its annual revenue at a whopping compound annual growth rate (CAGR) of 55% between 2016 and 2022. Its stock has dropped more than 80% from its record high of $443.49 in February 2021, but it remains more than 360% above its IPO price of $15.
Image source: Getty Images.
That's a solid seven-year return, but the bears and bulls remain divided regarding Twilio's future. I recently discussed those issues, but today I'll highlight three other aspects of Twilio's business that shrewd investors should be familiar with now.
1. Amazon is a partner instead of a competitor
From 2004 to 2005, Twilio's founder and CEO Jeff Lawson worked at Amazon and helped build the technology that would eventually become Amazon Web Services (AWS). Realizing there was an opportunity to carve out a niche market in cloud-based communication services, Lawson co-founded Twilio with Evan Cooke and John Wolthuis in 2008.
When Twilio went public eight years later, the bears claimed that AWS -- which had become the world's largest cloud infrastructure platform -- could render it obsolete by integrating similar communication services into its ecosystem. But that never happened. Instead, Twilio actually runs all of its services on AWS and is one of its major partners.
Back in 2016, Twilio signed two deals with Amazon to directly integrate its communication tools into AWS. That deeper partnership enabled developers on AWS to easily add Twilio's voice calls, text messages, audio clips, and other features to their mobile apps. In other words, there's no reason for Amazon to directly compete against Twilio.
2. It's relied heavily on acquisitions for growth
Twilio has acquired a long list of companies -- including Tikal, Beepsend, Ytica, SendGrid, Core Network Dynamics, Electric Imp, Segment, Ionic Security, Zipwhip, and Boku Identity -- over the past seven years to expand its cloud-based communications ecosystem.
Its two largest were SendGrid, which it bought for $3 billion in 2018 to add email features to its platform, and Segment, which it acquired for $3.2 billion in 2020 to collect more customer data.
Twilio's acquisitions created a big gap between its inorganic and organic growth rates. In 2021, its revenue rose 61%, but a lot of that growth was driven by Segment and Zipwhip. Excluding those newer divisions, its organic revenue only grew 42%. In 2022, its revenue rose 35% but only grew 30% on an organic basis.
Back in 2020, Twilio claimed it could grow its organic revenue by at least 30% annually through 2024. But it withdrew that guidance last November, and analysts expect its reported revenue to grow at much slower CAGR of 13% from 2022 to 2025. That slowdown might drive Twilio to make more acquisitions to boost its revenue again, but investors should be wary of it "diworsifying" its business with impulsive purchases.
3. Its insiders are warming up to the stock again
When Twilio's stock hit an all-time high in early 2021, its enterprise value swelled to $70 billion -- or 25 times the revenue it would generate that year. Today, it has a much lower enterprise value of $9.9 billion -- or 2.4 times this year's sales.
Twilio's valuations were compressed by concerns regarding its slowing growth, lack of profits, and the long-term impact on its gross margin from carrier fees -- which many telecom companies now charge third-party apps for accessing their networks. Smaller competitors like MessageBird, Plivo, Bandwidth, and Ericsson's Vonage could also gradually chip away at its dominant market share.
Yet, Twilio's insiders don't seem worried about those near-term headwinds. Over the past 12 months, they actually purchased 28 times as many shares as they sold. And in the past three months, they bought 94 times as many shares as they sold. That warming insider sentiment suggests that Twilio's recent problems are merely cyclical instead of existential.
Is it the right time to buy Twilio?
These three facts tell us that Twilio doesn't need to fret over competition from larger cloud platforms like AWS (for now), that it's expanding into a more diversified cloud communications company through acquisitions, and its stock might be oversold. But as I've said before, I'm not turning bullish on Twilio until its revenue growth accelerates, it stabilizes its gross margin, and it demonstrates that it can expand and evolve into a more diversified cloud-based communications company.
