The Twilio Inc (NYSE:TWLO) IPO kicked off with a pop Thursday. But this offering might not just be an exciting opportunity down the road — it could be a turning point for the IPO market.
Twilio — a cloud communications company that allows users to make phone calls and send texts over web service APIs — is up big today. The Twilio IPO priced at $15, which was above an initial trading range of $12 to $14 for TWLO stock — then proceeded to surge 70% after hitting the market.
But now that mom-and-pop investors have a shot at buying the Twilio IPO … should they?
A Look at Twilio (TWLO)
Twilio, which was founded in 2007, put its focus on developing cloud-based communications technology — a move that looks prescient now. Apple Inc. (NASDAQ:AAPL) had just launched its iPhone, and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) was gearing up for its mobile efforts with Android.
Twilio’s technology allowed developers to easily implement functions such as voice, texting and video. The company also kept most of the usage free, which helped gin up substantial user growth; TWLO boasts more than 900,000 developer accounts, according to the Twilio IPO filing.
In fact, Uber was one of Twilio’s earliest customers; the ride-hailing company used Twilio’s system to update customers in real-time about ride requests and allow drivers/riders to contact one another.
Growth has been unsurprisingly robust, with revenues soaring from $49.9 million to $166.9 million from 2013 to 2015.
While that all sounds great, though, there are some nagging red flags that potential investors in the Twilio IPO should be aware of.
For one, TWLO bleeds, and bleeds well; most recently, the company lost $6.5 million during its first quarter, which came on revenues of $59 million. That loss was better than the $8.7 million it ate in the year-ago quarter, though.
Twilio also has high levels of customer concentration. Last year, Facebook Inc’s (NASDAQ:FB) WhatsApp accounted for a whopping 17% of overall revenues. That should worry would-be TWLO investors, as Facebook is known to be a tough negotiator. Just look at the case of Zynga Inc (ZNGA). Before its IPO, the company received the bulk of its revenues from Facebook — but the social networking giant eventually became more aggressive and shut Zynga out, which was a key reason for the plunge in ZNGA stock.
The Twilio IPO: Bottom Line
This year has only seen a handful of tech IPOs hit the markets, so the heavy demand for TWLO stock likely has more to do with just pent-up demand in general.
But those recent deals have been poor investors — especially for investors who bought shares once they hit the open market. Just take a look:
|Company||Return From the First Day of Trading|
|Atlassian Corporation PLC (TEAM)||-5%|
|Pure Storage Inc (PSTG)||-32%|
|Square Inc (SQ)||-32%|
It’s difficult for smaller companies to meet the tough expectations of Wall Street right now. Even top-notch companies like LinkedIn Corp (LNKD) are looking for ways out.
Also, the valuation on the Twilio IPO isn’t cheap. “Trading at 6 to 7 times forward-looking revenues seems really aggressive,” Mark Hasebroock, founder of Dundee Venture Capital, said in an interview with InvestorPlace. “So, while its a nice exit for the investors., it will not be easy to sustain this valuation.
“This makes me wonder why they chose the public markets for ‘only’ $100 million.”
I suggest investors hold off on TWLO stock until the hype subsides and shares lose some of this froth.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.