Shares in Twilio (NYSE:TWLO) continue to defy gravity as investors made rich by the Fed continue to focus on what’s working.
Cloud-based applications are what’s working.
Twilio’s cloud-based communications services, which let companies quickly add voice, text, and video support to their apps, seem like a winning play.
Twilio opened for trade July 27 at $250 per share. That’s a market capitalization of nearly $35 billion for a company expecting 2020 revenue of about $1.45 billion and no profit. The company expects negative quarter-to-quarter growth for the June quarter, with revenue of $341 million, and a loss of 8 cents, although it could be just a nickel.
Yet, despite the bubbly valuation, most of the analysts tracked by TipRanks still rate Twilio stock a strong buy. Only four analysts call it so much as a hold. One has the shares at $300 in a year.
What’s Going On?
It seems that every niche Twilio goes into these days turns to gold. The latest is healthcare.
Twilio achieved HIPAA compliance in February, meaning doctors and clinics can use it in cases involving patient medical records. Now Epic, one of the leading electronic health record (EHR) providers, has enabled it for virtual medical calls. So have ZocDoc, a medical appointment service, and Doximity, a dialer service. There are already 100,000 physicians on the Doximity app alone. Twilio also powers New York City’s novel coronavirus contact tracing efforts.
Twilio says video is not yet material to its results. But usage of its video product is up more than five-fold year over year as physicians rush to connect with patients virtually.
Twilio’s stock market success has also given it the power to make acquisitions. The latest is Electric Imp, an Internet of Things platform that had drawn $44 million in venture funding. Electric Imp’s hardware modules turn things like parking meters into connected devices.
Two years ago, Twilio bought Sendgrid for its e-mail capability in what was reported to be a $2.2 billion shares deal. That stock is now worth over $6.6 billion.
Trouble in S3
Yet, not all is going well in the Twilio-verse.
The Register reported last week that some code for its TaskRouter Software Development Kit, housed on the Amazon (NASDAQ:AMZN) cloud, had been left publicly accessible. This means a hacker was able to insert a Web address associated with Magecart malware into the code. Magecart creates what amounts to a credit card skimmer in breached applications.
RiskIQ, a security site, said misconfigured S3 storage buckets at Amazon have been used to inject phony contests and fake download pages onto hundreds of web sites over the last few months. Twilio said it mitigated the hack within an hour of its discovery, but it was available online for a full day. It promised to improve monitoring of S3 bucket policy changes.
The incident demonstrates just how vulnerable cloud-based apps can be. Twilio’s growth makes it an increasingly juicy target. Compromising its code can compromise the apps of its customers.
The Bottom Line on TWLO Stock
Twilio says COVID-19 has accelerated digital transformation by up to six years. Almost one-third of technology spending involves video and web conferencing.
But that doesn’t mean that Twilio’s business has expanded sixfold during the pandemic. Growth had been averaging 10% per quarter. The June quarter indicates it turned negative during the pandemic’s height.
Twilio is still a relatively small company. It generated just $35 million of operating cash flow in 2019, although it had $22 million in the March quarter. The value of TWLO stock gives it an opportunity to make deals like the one with Electric Imp. But it doesn’t guarantee those bolt-on deals see Twilio-like success.
Twilio may be worth its market cap in five years. But do you want to pay for that valuation now?
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology 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 shares in AMZN.
