Twilio (TWLO 1.47%) and Amazon (NASDAQ: AMZN) can be considered the David and Goliath, respectively, of the cloud services market. Twilio's cloud platform processes text messages, voice calls, and videos for mobile apps. Instead of building those features from scratch, developers can outsource those features to Twilio with a few lines of code.
Amazon's cloud platform, Amazon Web Services (AWS), is the world's largest cloud infrastructure platform. Its customers can rent computing power and storage from its platform instead of buying lots of servers or building their own data centers. AWS also integrates other data processing and development tools into its platform.
Twilio was notably co-founded by Jeff Lawson, who helped develop the technology that would eventually evolve into AWS during his time as a technical product manager at Amazon. During his time at Amazon, Lawson recognized the growth potential of dedicated cloud services for mobile apps -- and that idea became the basis for creating Twilio.
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Twilio is still a baby compared to Amazon, but could it grow into a cloud titan over the next few decades? Let's look back at its post-IPO trials and tribulations to find out.
It's gone on a wild ride since its public debut
Twilio went public at $15 per share on June 23, 2016, and it closed at its all-time high of $443.49 on Feb. 18, 2021. At its peak, its enterprise value reached $70 billion -- or 25 times the revenue it would go on to generate in 2021.
At the time, investors were dazzled by Twilio's explosive growth rates. From 2015 to 2021, its revenue soared at a compound annual growth rate (CAGR) of 60% from $167 million to $1.76 billion. That feverish growth was largely driven by the increased integration of voice calls and text messages into mobile apps, but it was also fueled by its acquisitions of smaller companies like Beepsend and Segment.
Today, Twilio's stock trades at about $72 with an enterprise value of $10 billion -- which is just over 2 times the sales it's expected to generate in 2024. Twilio's stock tumbled as its revenue growth cooled off, its gross margin shrank, and rising interest rates compressed its valuations. It also failed to achieve its own ambitious long-term growth targets.
During its investor day presentation in October 2020, Twilio claimed it could grow its organic revenue by at least 30% annually through 2024. Its revenue actually increased 42% organically (and 61% as reported) in 2021, but rose just 30% organically (and 35% as reported) to $3.8 billion in 2022. It eventually abandoned its 30% growth target last year, and analysts expect its reported revenue to only rise 8% in both 2023 and 2024.
By comparison, AWS' sales rose 29% to $80.1 billion in 2022 and 13% year over year to $66.6 billion in the first nine months of 2023. It's generally a bright red flag when an underdog is growing at a much slower rate than the market leader.
Are Twilio's high-growth days over?
Twilio's growth slowed down as the macro headwinds forced companies to rein in their spending on cloud services. It also faced fierce competition from similar services like MessageBird, Bandwidth, and Ericsson's Vonage.
To make matters worse, it's generally difficult for Twilio to lock in its customers because it only charges usage-based fees -- which are paid whenever its service is accessed -- instead of selling stickier subscription plans. Meanwhile, its margins are being squeezed by rising carrier fees, which telecom companies now charge third-party apps to access their networks.
Twilio also runs its services on AWS' backbone instead of its own cloud infrastructure platform. Therefore, it probably won't evolve into a cloud giant like AWS without spending billions of dollars to build its own cloud infrastructure.
As Twilio's growth cooled off, it authorized a $1 billion buyback plan last February -- which was a troubling move because it strongly suggested it was running out of fresh ways to expand its business. It was also an odd decision to plow so much cash into buybacks when the company remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis. To top it all off, Twilio's recent layoffs, intense pressure from activist investors, and Lawson's recent resignation from the CEO position all strongly indicate the company could struggle to grow over the next few years.
Twilio probably won't become the next Amazon
Twilio's early mover's advantage gave it a promising start in the cloud communications space, but I'm not convinced it can expand beyond its saturated niche. AWS was able to scale up its operations over the next two decades because it was funded by Amazon's larger e-commerce business, but Twilio needs to grow up on its own. Twilio's business might stabilize over the next few years, but investors looking for the "next Amazon" should check out other growing cloud-based companies instead.
