The deflation of the Twilio Inc (NYSE:TWLO) IPO has certainly been stunning. The company pulled off its offering in June at $15 a share and within a few months, the price hit a nose-bleed $69. But then there was an avalanche of selling with Twilio stock. As of now, the price is at $31.
Despite all this, TWLO has continued to grow at a rapid pace. In the latest quarter, the revenues jumped by 60% to $82 million, as the number of active customer accounts went from 34,457 to 36,606.
In fact, Twilio beat the Street consensus. The company also forecasted that the growth ramp would continue throughout the year.
But it was not enough to get TWLO stock back into gear. For the most part, Twilio stock has been trading in a tight range.
So might there be an opportunity? Perhaps TWLO stock has bottomed out and is poised for a move on the upside? Well, to see, let’s take a look at three pros and three cons:
Three Pros to Twilio Stock
Powerful Platform: TWLO has a suite of powerful cloud-based applications, allowing for SMS, chat, voice calling and video. A developer can easily embed this technology into an app, providing access to a sophisticated communications network.
The business model is also enticing. That is, payments are only required when there is usage of the Twilio service.
As a result, the company has been able to quickly attract developers. Note that there are over 1 million accounts.
Going Upmarket: TWLO has an Enterprise Plan, which is focused on large customers that have tough requirements for compliance, security and administration. A key part of this was the recent granting of ISO 27001 certification, which is a global standard for security.
While still in the early stages, the Enterprise Plan is showing encouraging results. For example, in the latest quarter TWLO snagged a major airline as well as Capital One Financial Corp. (NYSE:COF) and the Blue Cross Blue Shield companies.
According to CEO Jeff Lawson, on the most recent earnings call: “We are seeing really good response in terms of the enterprise. Again, I would say this is our developer first model at play where developers are the ones bringing Twilio into the enterprise just like they’ve brought us into a number of different types of technology first companies.”
Growth Opportunity: Companies like Uber, Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) have raised the bar when it comes to apps and cloud technologies. Customers have come to expect that they can get quick service with just a few taps.
This is where TWLO is so powerful. The company’s systems can easily allow for must-have features to remain competitive.
So in light of this, it should be no surprise that the market opportunity for Twilio stock is enormous. According to research from IDC, it’s estimated at about $45.4 billion.
Three Cons to Twilio Stock
Competition: It’s certainly fierce. Just some of the rivals include Cisco Systems, Inc. (NASDAQ:CSCO), Vonage Holdings Corp. (NYSE:VG), CallFire, Nexmo and Bandwidth.com. In fact, some of TWLO’s own customers could wind up being competitors, such as Facebook Inc (NASDAQ:FB). And telecom operators like AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) could leverage their own networks to take on TWLO.
Granted, the low-price strategy of the company has probably been a key in maintaining marketshare. But then again, this may make it tough for it to ultimately get to profitability on a GAAP basis.
Customer Concentration: It is fairly heavy. Last year about 30% of revenues came from only 10 customers. Keep in mind that FB’s WhatsApp represented 9% and Uber was over 10%. It’s important to note that TWLO also generally allows customers to terminate their contracts at any time.
Now this is not to say that these customers will suddenly bolt. Again, TWLO has continued to invest in R&D and to provide strong service.
Yet there are still risks. Let’s face it, large companies can certainly leverage their power to exact better terms, especially when there are alternatives available.
Valuation: Even with the plunge in Twilio stock, the multiple is still at hefty levels. Note that the price-to-sales ratio is roughly 10X. Even for a fast-growing cloud company, this is steep.
Take a look at some of the valuations in the industry:
|New Relic Inc (NYSE:NEWR)||8X|
|Box Inc (NYSE:BOX)||5.3X|
|Apptio Inc (NASDAQ:APTI)||3X|
Bottom Line on TWLO stock
Twilio definitely has a strong platform and it has continued to innovate it. Going forward, the company should benefit from the megatrends of cloud computing and mobile.
But for now, it’s probably best not to take a position in TWLO stock as the valuation remains fairly high. Let’s face it, there are cheaper alternatives available when it comes to fast-growing enterprise plays, such as NEWR, BOX or APTI.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.