Almost two years ago to the day, I wrote about Twilio (NYSE:TWLO), questioning whether TWLO stock was worth $15 or $30.
At the time, Twilio stock was trading around $25 and had been on a volatile run in its first year as a public company, trading as high as $71 within the first 100 days of its June 2016 IPO. Investors were having a hard time figuring out if the communication platform-as-a-service (CPaaS) had enough growth in it to pave a pathway to profitability.
I reckoned that it did.
Twilio was adding customers at a significant clip to offset any loss of revenue from Uber (NYSE:UBER) which at the time — in its pre-IPO status — was looking to go in another direction with its cloud-based communication services.
Also, Twilio’s non-GAAP losses were getting smaller by the quarter. If it could improve GAAP or even non-GAAP profitability, TWLO stock would naturally go higher.
At $30, I suggested TWLO stock owners hang tight despite the Uber defection.
It turns out a lot has changed.
For starters, TWLO stock closed yesterday at $137, more than 450% higher than in May 2017, for an annualized total return of 137%. TWLO premarket this morning is down more than 3% along with the broader market indexes.
Secondly, it showed 154,797 active customer accounts at the end of March, 187% higher than a year earlier, and 280% higher than at the end of March 2017.
Finally, in fiscal 2016, Twilio had a non-GAAP annual loss of 16 cents a share. In fiscal 2018, the loss had turned to a non-GAAP profit of 11 cents a share, a 169% improvement over the past two years.
Add to this, the acquisition of SendGrid and its cloud-based marketing platform in February for $2 billion, and you’ve got the makings of a powerhouse in cloud-based services.
So, a lot’s changed, including its price-to-sales ratio, which in May 2017 was around 7.4; today, it’s close more than 23, forcing many investors to take profits.
Never Sneeze at a Profit
Taking profits in any market is always a subjective opinion.
Some like to let their winners run and others want to get their cost out so they can play on someone else’s dime. Regardless of where you sit on this, it’s understandable to want to realize profits on a stock that’s gained 58% year to date compared to the S&P 500 index‘s 13.8% gain.
However, it’s also important to consider why Twilio’s P/S multiple has doubled since May 2017, before deciding to sell its stock.
First of all, there’s no question that cloud-computing — public, private, and hybrid — have taken off over the past two years, leading investors to pay more for cloud-computing stocks like Twilio. One only needs to look at the run-ups of both Microsoft (NASDAQ-:MSFT) and Amazon (NASDAQ:AMZN) shares over the past two years to know cloud-related stocks are riding a significant tailwind.
Tailwinds do eventually fade, but this one appears to be in the early innings despite the tremendous growth in recent years. Estimates put the global cloud computing market at $300 billion by 2022, a compound annual growth rate of 12% over the next four years.
As my colleague Luke Lango recently wrote, Twilio’s got a lot going for it, including the fact that its services will go from a “want” to a “need” soon.
“The customer base is growing by over 30%. Revenues are growing by nearly 70%. The retention rate is 95% and up,” Lango wrote on May 14. “In other words, everything is going right for this company, and it will continue to go right as the CPaaS market goes from niche to mainstream over the next several years.”
I couldn’t agree more.
Bottom Line on TWLO Stock
Here it is, two years after recommending Twilio stock, and it’s clear that more growth is on the horizon for the company. Ultimately, that will lead to higher gross margins, operating margins, and GAAP profitability.
Do I think TWLO stock is the perfect holding? No, I do not. However, when it gets to GAAP profitability, it will be pretty darn close.
In my eyes, Twilio stock is still a buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.