On June 4, Twilio (NYSE:TWLO) closed the sale of up to eight million shares of Twilio stock to underwriters at JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS).
The underwriters bought 7,012,622 shares of Twilio stock for approximately $121.52 a pop. They also have an option to purchase an additional 1,051,893 at the same price. While I haven’t heard whether they bought the additional shares, given TWLO is trading around $136 as I write this, I’d say the odds are good that they did.
If you’ve owned Twilio stock for a long time, here’s some good news: this move is a good sign that capital allocation is a priority for the company. It’s also a move that Henry Singleton would approve.
Who’s Henry Singleton?
He was the founder of Teledyne Technologies’ (NYSE:TDY) predecessor company, Teledyne Inc., in 1960. A lot has changed between the Teledyne of today and the one that Singleton ran between 1960 and 1991. However, a common thread is productivity. In this case, Singleton used the company’s common stock to grow the business from nothing to annual sales of more than $450 million.
Here’s what I said about Singleton in 2012:
“Henry Singleton, founder of Teledyne — one of America’s most successful conglomerates — used share repurchases with military-like precision to grow his company. When shares were expensive, he used shares to acquire companies; when they were cheap, he bought them back. There was no middle ground for Singleton, and the strategy worked flawlessly.”
Singleton didn’t have a problem taking on debt. However, if the company’s shares were trading at or near a historical high, he didn’t hesitate: he acquired companies using the strength of its stock. On the flip side, Singleton reverted to debt when Teledyne’s share price was down on its luck.
Henry Singleton was a capital allocation visionary who would appreciate Twilio’s recent move to raise cash.
Twilio Stock Up 813% Since IPO
Twilio went public almost three years ago today at $15 a share. At the end of May, it reached an agreement with underwriters to sell some of its stock. Twilio shareholders that were still holding after three years were sitting on an unrealized gain of 760%.
In May, I looked back on my recommendation of the Communication Platform as a Service company in June 2017. At the time of my 2017 article, TWLO stock was trading around $25 and had just lost Uber (NYSE:UBER). The ride-sharing service decided to look for other cloud-based communication services.
Investors were freaking out.
I recommended that investors hang tight rationalizing that Twilio’s losses were getting smaller by the quarter. Also, it had enough growth to find its way to profitability. I’m glad I did because TWLO stock has seriously outperformed the entire U.S. market over the past two years.
In my May article, I continued to recommend Twilio stock despite the fact it was trading at 23-times sales. Now, based on excellent first-quarter results that saw revenues grow by 81% year-over-year and 14% on a sequential basis, Morningstar’s got it at 18 times sales. That’s a reasonable amount for a company growing so fast.
As for earnings, prospects for Twilio stock appear bullish: TWLO finished Q1 2019 with a non-GAAP profit of $6.4 million on $233.1 million in revenue. That’s considerably better than the $4.2 million non-GAAP loss on $129.1 million in sales a year earlier.
The one fly in the ointment: Twilio’s Q1 2019 GAAP loss from operations was $87.6 million, 3.6 times the GAAP loss a year earlier.
It’s the GAAP loss combined with the share offering in early June that has kept TWLO stock from revisiting its all-time high of $151, which it hit on June 20.
The Bottom Line on Twilio Stock
Twilio’s net proceeds from the June 4 share offering were approximately $978 million. That’s assuming underwriters bought the extra one million shares. Management hasn’t specified what it will do with the funds. However, paying down some or all of its $440 million in convertible notes is one possibility.
Another possibility is to use money to make an acquisition that strengthens its position in the CPaaS marketplace.
Either way, I like the heads-up play. opting to raise cash through equity sales during a robust phase for both stock and markets is merely good business.
If you own TWLO stock, I’d stay long for years to come.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
