Twilio Inc (NYSE:TWLO) has experienced a rough ride since just after its IPO. Twilio stock more than quadrupled in value from its IPO price of $15. However, after this honeymoon phase, its share price fell into the low $20s and has struggled since.
Now, as TWLO faces its Feb. 13 earnings announcement, investors are left wondering whether Twilio will take their stock portfolios into the clouds or bury them. Given its struggles, success for TWLO stock likely lies in finding a buyer while the company remains worth buying.
TWLO Still Not Profitable
For 4Q 2017, analysts expect a loss of 18 cents per share. This is down from the 10 cents per share loss for the company in 4Q 2016. However, analysts expect an improvement in revenues. They will look for $103.71 million in quarterly revenue. If this holds, revenues will have risen 26.5% from 4Q 2016 when the company brought in $81.95 million.
TWLO has met or exceeded estimates in most quarters. Given the history, investors should expect numbers at or possibly a little better than the consensus. Even with the earnings beats, all forecasts predict quarterly losses for the foreseeable future.
Many growth companies go on to earn money in time. However, the lack of a moat could easily prove itself to be the obstacle that forever delays profitability for Twilio.
Lack of a Moat for Twilio Stock
It’s Twilio’s cloud technology that helped make the ride-sharing company Uber possible. Unfortunately for TWLO stock, Uber figured out that this important cloud-based technology can be outsourced elsewhere or replicated in-house. Therein lies the problem for TWLO stock. If other companies or clients can replicate the service, what is the point of Twilio’s existence?
As our own James Brumley points out, upstarts such as Bandwidth Inc (NASDAQ:BAND), Zendesk Inc (NYSE:ZEN) and RingCentral Inc (NYSE:RNG) have emerged as competitors. What’s to stop TWLO’s peers from taking business or the big guys from just doing it themselves?
To be fair, TWLO has responded by reducing its dependence on Uber. Now, it’s acquired customers such as Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN).
Annual revenue growth is down from the 80-90% rates of earlier years. However, analysts predict 25-35% revenue growth for the foreseeable future, so business keeps growing for now. The concern remains what happens if and when Microsoft and Amazon follow Uber’s example?
Should TWLO Sell Itself?
Given its lack of a moat, perhaps the best solution for Twilio might be to put itself up for sale. With its stream of revenue growth, Microsoft or Amazon could decide that buying out TWLO might serve as a lower-cost solution. With a market cap at about $2.2 billion, either technology giant could easily buy them out.
Still, I do not recommend buying TWLO stock in hopes this will come to pass. Despite losing more than 60% of its value from its post-IPO high, Twilio remains far from cheap. The company trades at almost six times the amount of its sales and over six times its book value. With a buyout far from assured, investors probably should look elsewhere.
Final Thoughts on TWLO Stock
Revenue growth for TWLO stock remains impressive, but without a moat to retain customers, achieving and maintaining profitability appears unlikely. The company will release its next earnings report on Feb. 13.
Few expect any significant revenue or earnings surprises. The question remains what customers the company is attracting and retaining? If Microsoft or Amazon decides to reduce or eliminate partnerships with the company, TWLO stock will struggle to recover.
While the company appears to have no tech-related moat, revenue growth gives TWLO some appeal as a buyout target. Still, a buyout remains one of many possibilities, so buying in hopes of this scenario remains risky. Given the risks, investors will more likely find success in a different investment.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
