There’s no denying Twilio (NYSE:TWLO) has been an impressive performer over the course of the past couple of years. Since the end of May 2017, Twilio stock has rallied more than 120%, backed by noteworthy sales growth.
The lack of actual GAAP earnings hasn’t been a problem for its buyers, who apparently believe the company can address such minor, pesky problems at a later date. Except, maybe it won’t be able to address that profit problem at a later date when it desperately needs to. And, even if it can, it may not matter.
Take a closer look at Twilio, and you’ll see prior red-hot growth rates aren’t sustainable. Revenue is projected to improve by an amazing 70% this year, versus last year’s 77%. Next year’s projected top-line growth of 34% is still huge but a relative letdown. The following year’s expected revenue growth of 26% is also better than average, but far from compelling to a crowd of TWLO stock owners accustomed to much more.
Worse, while Twilio’s top line is stabilizing and normalizing, there’s still not a hint of actual income let alone real income growth as that revenue rally starts leveling off. That’s a problem for a ticker valued as richly as Twilio stock.
Twilio, Reality and Perception
Fans and followers have most certainly already prepared their counterarguments, ranging from “You just don’t understand the business” to the (fair and accurate) point that Amazon.com (NASDAQ:AMZN) wasn’t profitable for years. A well-rehearsed crowd is also going to note that on an operational basis, Twilio actually is profitable. They’ll argue GAAP numbers aren’t an indication of the true strength of the business.
All three arguments break down under scrutiny though.
As for the Amazon argument, for every Amazon, there are five more companies like it that investors liked even more in their infancy that never survived. Palm Pilots, GeoCities, Gizmondo and etoys.com are just some of the names that come to mind.
They all had a loyal fan base, and some of them even made a go of it. None of them had real staying power. They were unable to turn an actual profit (not just an operating profit) long enough to remain intact.
As for the business itself, there’s a distinct lack of barrier to entry. Now that Twilio and others have proven there’s a market for cloud-based self-service-everything through the use of apps, more companies can replicate the idea.
And they are. Nexmo and Bandwidth along with several other unfamiliar names are quietly moving into a price war with one another, but more concerning than that, powerhouse players like Cisco Systems (NASDAQ:CSCO) are slowly encroaching onto Twilio’s turf.
No young, unprofitable outfit wants to go toe-to-toe with a Cisco.
And, as for the lack of real earnings, this is where the bullish case for Twilio stock starts to break down.
Just for the sake of argument, let’s say Twilio manages in the foreseeable future to drive typical tech profit margins of 10% of revenue. With 2021’s projected revenue of $1.86 billion translating into earnings of $186 million, TWLO stock is still priced at a stunning 86 times its long-term forward-looking earnings.
And of course, that’s a stretch assumption. As the top line’s ascent starts to fade along with operating income growth, reported (or GAAP) income is expected to continue to deteriorate.
Sooner or later it’s going to have to make some money, but it’s not clear that’s in the cards.
Underscoring the concern that the bigger the company gets, the uglier its fiscal results become, is the cash flow trend to date.
For a short while last year Twilio actually mustered positive cash flow, but on the heels of best-ever revenue last quarter, operating cash flow turned deeply negative again.
It tacitly suggests that scale works against, rather than for, the business that’s become increasingly crowded and now entered a price war/outspending phase.
Bottom Line for Twilio Stock
Perhaps the final argument against any bearish thesis for Twilio is the fact that despite all the reasonable concerns, analysts still love it. The pros collectively rate it a little better than a “Buy” (stopping short of a “Strong Buy”), and the consensus target of $146.59 is 15% higher than the current value of Twilio stock. Surely this many analysts can’t be wrong.
They’re not “wrong” per se, but they arguably are speculating.
It’s a reality that not even most people in the research industry care to concede, but these professional stock-handicappers are just as prone to buying into hype as the average retail investor is. This is one of those times where analysts may be making optimistic calls for the wrong reason. Maybe it’s fear of being on the wrong side of the mob.
So far it’s worked out. Just bear in mind that the consensus target price for GoPro (NASDAQ:GPRO) back in 2014 shortly after its IPO was $60. Reality has dragged GPRO back to its current price near $6.
Analysts dive into the hype-pool too. Too many of them choose to not even discuss a fan-favored company’s weak spots, so the average investor won’t either.
That doesn’t mean Twilio doesn’t have them though.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
