Twilio Inc (NYSE:TWLO) delivered what shareholders were waiting for. After a pretty forgettable 2017 so far, TWLO stock is up huge Tuesday morning, trading right at the year’s highs following blowout revenues for its second quarter.
Twilio grew its top line 48% year-over-year, and the $95.9 million haul topped analysts’ estimates by almost $10 million.
The question now is whether this will do enough to reset the narrative around TWLO stock. Until this earnings report, bears clearly had the upper hand. Losses in major enterprise customers appeared to be overshadowing gains elsewhere. And while Twilio leads its sector, there is plenty of competition out there.
In light of the positive earnings report, let’s see if Twilio’s pros finally outweigh its risks.
TWLO Stock Cons
Uber Downshifting: Twilio has a large customer base. However, it has traditionally relied on a few key clients to drive a lion’s share of their business. Its most important has been privately held Uber.
However, management admitted that Uber is increasingly shifting away from its former reliance on Twilio’s services. Uber previously constituted 17% of Twilio’s revenues, however this fell to just 12% as of Q1 2017. CEO Jeff Lawson at the time stated, “Previously, [Uber] used our platform to support most of their used cases in majority of their operating territories. Now, they’re optimizing by used case and by geography, resulting in a more active multi sourcing program.” Investors took that to signal more trouble ahead.
Heavily Competitive Segment: At this point, Twilio has the best-presented package within its space. However there is plenty of competition within the sector, including strong players such as Nexmo and Plivo. That’s not the end of it. Larger companies can program some of Twilio’s capabilities with their own in-house solutions. As companies scale, it becomes increasingly appealing to try to cut costs further, as leading customers such as Uber are doing. Additionally, the telecom companies themselves could roll out their own solutions in this space, cutting out Twilio as the middleman.
Earnings Not All Good News: TWLO stock is up 13% Tuesday morning following a strong earnings report. However, there are still some real concerns that bears could latch onto in coming days.
For one, this upcoming quarter’s guidance looks pretty soft. The company projects just $91 million to $93 million in sales for the upcoming quarter. That’s pretty disappointing, given that this quarter came in at $96 million and topped analyst estimates by almost 10%. Perhaps the company is just sandbagging its estimates, but there could be a hint of more major client defections in there as well. Additionally, the company continues to project EPS losses for both the next quarter and full-year 2017.
TWLO Stock Pros
Expanding User Base: Twilio has gotten hammered on news of major customer defections. But that’s not the whole story. Twilio’s core business opportunity is in serving as the communications provider for small to mid-sized businesses that don’t have the technical wherewithal to build their own solution in-house.
Sure, the likes of Uber can save money doing it on their own. But there’s far more to Twilio than just Uber.
According to Monday’s earnings report, Twilio has now grown to 43,471 active customers; that’s up from fewer than 31,000 last year. And it tends to add 4,000 new customers or so per quarter. The majority of these customers aren’t spending all that much, and thus are likely to be loyal; the learning curve of switching providers typically isn’t justified just to save a few bucks.
Relative Value Compared With Nexmo: Vonage Holdings Corp (NYSE:VG) purchased Twilio’s largest competitor last year. This was good news for TWLO stock in several ways. For one, Vonage itself is a struggling firm with a relatively small $1.5 billion market cap and almost no profitability. That lack of financial firepower may limit Nexmo’s ability to expand rapidly or engage in destructive pricing wars with Twilio.
Also, the Neymo purchase serves as a comparison point. Vonage paid $230 million for Nexmo last year, and is estimated to have paid about 7x sales for the firm. Twilio, by contrast, is selling at 5.3x its sales. That’s a relative discount, when in fact you’d expect a premium given Twilio’s scope and dominant market position.
Short Squeeze Potential: Short sellers continue are fixated on TWLO stock. According to the latest data, bears have sold more than 19 million Twilio shares short. That accounts for almost 40% of the float. That’s huge.
Even while Twilio shares have struggled throughout 2017, short sellers haven’t relented. At the start of the year, speculators had only shorted 9 million TWLO shares. This figure rose to 16 million by the end of May, and shorts have doubled down on the company, increasing their negative bets to almost 20 million shares in recent weeks.
Following Twilio’s impressive earnings beats, some shorts are getting squeezed out this morning, and more pain could be on the way. TWLO stock hasn’t topped $35 in 2017 prior this earnings report, if it can get above there, it’d likely trigger more of a technical reaction further upward.
Twilio stock is looking a lot better after Q2’s earnings report. The strong revenue growth in this most recent quarter should put to rest much of the concern that Uber’s departure would kill the business. In the long run, the company’s increasing user base appears likely to eventually generate value for shareholders.
In the short-term, though, more defections from key enterprise customers may keep a lid on the price of TWLO stock. I see this as dead money for the next year once this short-covering rally finishes; there are better growth stories elsewhere.
If the company can start generating positive earnings, the situation will look brighter. But for now, revenue growth may not be enough.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.