Twilio's (TWLO 1.47%) stock closed at its all-time high of $443.49 on Feb. 18, 2021. That marked a 2,857% gain from its IPO price of $15 in June 2016, and its market cap hit $72.8 billion -- or 26 times the revenue it would generate in 2021.
But today, Twilio trades at about $68, with a market cap of $12.4 billion -- less than three times the revenue it's expected to generate in 2024. Its stock plunged as its growth cooled off and rising interest rates compressed its valuations.
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Twilio burned the investors who bought its stock during the apex of the meme stock mania, but it's still generated a respectable gain of over 350% since its IPO. Should investors expect it to regain its mojo, soar back to its all-time high, and grow into a trillion-dollar tech giant over the next three decades?
Is Twilio saturating its core market?
Twilio's cloud-based platform processes integrated voice calls, text messages, videos, and other content for mobile apps. Instead of building those features from scratch -- which can be time-consuming, buggy, and difficult to scale as an app gains more users -- developers can simply outsource those features to Twilio with a few lines of code.
Twilio then charges those customers -- which include Airbnb, Uber, and DoorDash -- usage-based fees whenever they access its platform. By working behind the scenes, Twilio makes it easy for Airbnb's guests to contact their hosts and Uber's passengers to message their drivers.
Twilio's early mover advantage in this niche market enabled it to grow its annual revenue at a compound annual growth rate (CAGR) of 59% from 2016 to 2020. Some of that growth was driven by acquisitions. But during its investor day in late 2020, Twilio boldly declared it could continue to grow its organic revenues by at least 30% annually through 2024.
Twilio withdrew that outlook after its growth cooled off over the past two years. Its revenue climbed 61% (42% organically) in 2021, but rose just 35% (30% organically) in 2022. Analysts expect its reported revenue to grow 8% in 2023.
The company blamed that slowdown on the macro headwinds that were driving companies to rein in their cloud-based spending. That might be the case, but it could also be saturating its core market and struggling to stay ahead of similar communications platforms like MessageBird, Bandwidth, and Ericsson's Vonage.
Analysts expect Twilio's revenue to only grow at a CAGR of 10% from 2022 to 2025. Meanwhile, Mordor Intelligence predicts the global cloud communication platform market will still expand at a CAGR of 18% from 2023 to 2028. We should take those estimates with a grain of salt, but they imply that Twilio could struggle to keep pace with the broader market.
The mathematical path toward a $1 trillion market cap
Assuming its price-to-sales ratio remains stable, Twilio would need to grow its annual revenue at a CAGR of 17% from 2022 to 2050 to reach a $1 trillion market cap.
That might seem like a realistic target for a higher-growth cloud company like Snowflake, but we're not seeing any clear signs that Twilio can accelerate its annual revenue growth to the high teens again. The broader cloud communication market could also mature over the next three decades as the growth of the mobile app market slows down and cloud software giants like Amazon and Microsoft roll out similar services.
As Twilio's business matures, investors will expect its profitability to improve. Unfortunately, the company has been consistently unprofitable on a generally accepted accounting principles (GAAP) basis ever since its public debut, and analysts expect it to continue to bleed red ink through 2025.
Three headwinds are preventing Twilio from turning a profit. First, its usage-based model limits its pricing power, gross margins, and the overall stickiness of its platform. Second, telecom companies have been squeezing its gross margins with higher fees for accessing their networks. Lastly, it's still spending a lot of money on stock-based compensation -- which consumed 17% of its revenue in the first nine months of 2023 -- to subsidize its salaries.
Twilio recently announced its third round of layoffs to stabilize its operating margins and narrow its net losses, but downsizing the business could also make it tougher to stay competitive in the evolving cloud software market.
Investors should look beyond Twilio's market cap
Twilio's stock might climb higher over the next few decades as it continues to expand, but I believe it will be extremely difficult to hit a trillion-dollar valuation by 2050. So instead of fretting over its fluctuating market cap, we should see if Twilio can successfully expand and evolve into a more diversified cloud-based communication services company. If it can pull off that difficult transformation, it could certainly grow from a large-cap company into a megacap one.
