At the dawn of the voice over IP era, back in the 2000’s, I wrote that voice had become a low-bandwidth internet application. Twilio (NASDAQ:TWLO) proved that all over again with a stellar quarterly report that sent TWLO stock up almost 40%.
Twilio offers a cloud platform that lets developers put voice support into their applications, alongside text and video. That’s a sweet spot for the novel coronavirus era, where distance learning has become the norm and hospitals need to coordinate people remotely.
Which explain Twilio’s March quarter. Revenue was $365 million, up 57% from a year ago. The company is projecting 35% annual growth in the second quarter.
The most curious number Twilio reported was its dollar-based net expansion rate. This is used by Software-as-a-Service companies to measure churn. It was 143%, meaning existing customers are staying as many new ones come on.
The Great Conversion
Twilio is at the center of “the great conversion” as companies adapt all communication to apps in the cloud. Notice how Uber (NASDAQ:UBER) makes text, voice, data and video all seem seamless? That’s the great conversion, or “digital transformation” as Twilio calls it.
Schools and hospitals are now rushing to do what service companies did. Twilio added 11,000 customers during the quarter, taking the roster to 190,000 and leading it to expand its work force to 3,060.
Twilio’s cloud-based system doesn’t just bring in new applications. It also replaces older telephone-based systems for customer relation management (CRM). Instead of using switches and the phone network, former answering services like Moneypenny now handle voice, chat and video from a single cloud platform, which scales dynamically.
This digital engagement is helping all cloud-based companies, not just Twilio. Old ways of doing business are being ripped out, replaced by cloud-based systems that let operators stand by from home.
Where’s the Profit?
Growth has a price … profit.
Twilio lost nearly $95 million, or 68 cents per share, during the March quarter. It invested heavily in its own people and systems to serve future growth. Even though Twilio’s share count was up almost 20% year over year, that loss per share was more than twice the previous year’s figure. Actual losses were up more than 260% from a year ago.
Twilio is handling the growth with only a small hike in its long-term debt, to $20 million, thanks to its cash flow. Twilio had almost $92 million more in cash at the end of March than it did a year earlier. Its financial picture, in short, has improved dramatically.
The question is, how should investors value all this?
Overnight profit taking meant Twilio began May 8 trading at $168 per share. That’s a market cap of over $23.5 billion on what could be, according to the most optimistic projection, $1.5 billion of 2020 revenue. Is Twilio worth 16 times forward revenue?
Twilio has already blown through its earlier one-year price target of $130, although TipRanks now has that raised to almost $157. Oops, that’s $13 less than it’s trading anow. Still, 11 of the 17 analysts the financial engine tracks say buy it here, with none saying sell.
Bottom Line on TWLO Stock
The TWLO stock price is, as they say, “out ahead of its skis.” That’s a ski-jumping term. It refers to a skier who is off-balance and could be headed for a hard fall, not a soft landing. (Remember the “agony of defeat” from ABC’s “Wide World of Sports?”)
This is not unusual in the current market. The Fed’s torrent of cash must go somewhere. Since most of it went to the investment class, not the working class, a lot of that cash is going into the market. That cash is looking for growth, and cloud stocks like Twilio offer lots of growth.
Just be aware that Twilio will have to windmill its arms to get back over its skis and keep growth going for some time to justify your buying it now.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
