2023-06-28 01:32:04 ET
Summary
- Twilio is positioned for double-digit growth in the UC&C sector, benefiting from increasing demand for hybrid-work solutions and cloud-based contact centers.
- The UC&C market is expected to expand from $71.26 billion in 2023 to approximately $222.61 billion by 2030, growing at a CAGR of 17.7%.
- I have a buy rating on TWLO stock with an end-of-year price target of $80.
Investment Thesis
Twilio Inc. ( TWLO ) is a prominent player in fast-growing market segments that facilitate digital customer engagement on a global scale. While facing competition on a global scale and experiencing margin pressure in significant messaging contracts, I expect TWLO to leverage its innovation capabilities and strong customer relationships to avoid being drawn into price wars in mature, large-scale deals. Twilio is positioned for double-digit growth in the mid-term within the UC&C sector, benefiting from the increasing demand for hybrid-work solutions and cloud-based contact centers. I have an end-of-year price target of $80 on the stock derived from a forward EV/Sales multiple of 3x applied to the 2024 revenue estimate of $4.65 billion .
Q1 Review and Outlook
Although Twilio's first-quarter results were slightly better than the company's guidance, with revenues reaching $1,006 million compared to the projected range of $995-1,005 million, there was a 2% decline in revenues quarter-over-quarter, which is a first-time occurrence for the company. The management attributed this decline to macroeconomic challenges faced by consumer-facing industries, including reduced consumption trends in e-commerce, on-demand services, and the crypto industry. Management also acknowledged that they are in the process of rebuilding their Data and Applications go-to-market strategy and anticipate an improvement in bookings throughout the year, with revenue following suit in subsequent quarters.
Twilio expressed the view that the inflection point for artificial intelligence [AI] has yet to be reached, suggesting that when it does arrive, organizations will reassess their existing technology stacks and seek to optimize them with new solutions. Twilio believes that AI will drive the next major platform shift, akin to the transitions from PC to web and web to mobile. The company considers its broad portfolio, particularly Segment, to be vital in providing companies with unique and proprietary customer data that can be used to contextualize customer interactions for AI-driven products.
Core Products & Target Markets
TWLO holds a prominent position in various rapidly growing market segments, particularly in the Communications Platform as a Service [CPaaS] market. It offers APIs that enable developers to integrate voice, messaging, video, and email capabilities into their software applications. Through its Super Network, which is built on the AWS public cloud, TWLO connects its customers' software with consumer devices worldwide by linking with communication networks and application providers. Despite facing increasing competition, TWLO's focus on innovation and its developer-centric go-to-market approach differentiate it and helps maintain its market share.
In 2018, TWLO introduced its own Flex contact center (CCaaS) product. However, its success has been limited thus far. I consider the CCaaS market challenging due to high barriers to entry and a complex partner ecosystem. Flex stands out with its developer tool-set approach and the ability to customize implementations to suit specific business operations. Initial successes for Flex have primarily been observed in market verticals with strong in-house developer teams.
The ongoing shift towards cloud-based digital customer engagement channels is expected to drive substantial market growth in the areas TWLO focuses on automating, such as marketing, operations, and service. The global pandemic has accelerated this adoption, as demonstrated by TWLO's impressive revenue growth. The success many companies achieved under challenging circumstances suggests that the adoption of these channels will continue to progress. There are still many segments, like healthcare and government, that rely on outdated systems and are ripe for digitization.
UC&C & UCaaS Growth to Remain Positive Amid Shift to Remote Work
Demand for unified communication and collaboration [UC&C] solutions, including UCaaS, could stay relatively solid in 2023. The UC&C market is estimated to expand from $71.26 billion in 2023 to approximately $222.61 billion by 2030, growing at a CAGR of 17.7% throughout the forecast period. UC&C is poised to rise this year as businesses migrate to cloud-based communications platforms, sparked in part by hybrid work.
Within the UC&C group, Twilio is among those companies with the highest 2023 growth outlooks, with consensus expecting top-line gains above 12% since the demand for hybrid-work solutions and cloud-based contact centers remains robust. They've all launched new features and products aimed at bundling several tools into a single offering, a strategy that's likely to persist as end users increasingly seek flexible, scalable, cloud-based UC&C services to meet their post-pandemic requirements.
Valuation
Twilio has aggressively restructured in a bid to sustain top-line gains while driving operating-profit growth through greater operational efficiency. A margin-accretive mix shift to software will provide an added lift, with the company targeting 300-400 bps average annual operating-profit gains from 2023-27. The company also plans to report a GAAP operating profit by the end of the period.
Though UC&C Twilio, RingCentral, Inc. ( RNG ) and Five9, Inc. ( FIVN ) may be able to maintain 15%-plus growth through 2025, their EV-to-sales multiples entering 2023 are down less than 7x vs around 12x average at the start of 2022. That's due to pressure from the economic slowdown and rising rates crimping valuations across the group. I expect demand for cloud-based UC&C tools to remain robust as the work-from-anywhere trend persists and even grows.
At this present valuation level, I believe TWLO could be interesting for investors who believe we have passed the worst of macro at this point. My end-of-year price target of $80 is derived from a forward EV/Sales multiple of 3x applied to the 2024 revenue estimate of $4.65 billion .
Risks to Target
Twilio relies heavily on revenue generated from Variable Customer Accounts, which are large customers without long-term contracts. Any changes in the company's contracts with these clients can have a significant impact on financial performance. Moreover, a significant portion of Twilio's business is believed to depend on global SMS usage and carrier costs. However, the emergence of newer messaging capabilities that are native to mobile phones, such as push notifications on Apple's iPhone, as well as platforms like Apple iMessage and Facebook Messenger, could potentially replace the usage of SMS and impact Twilio's revenue.
Conclusion
Twilio offers developers the tools to create, expand, and manage real-time communication features like SMS, voice, video, and authentication in their software applications. The company's success in attracting well-known customers such as Uber, WhatsApp, and Airbnb, combined with positive feedback from customers during the due diligence process, demonstrates Twilio's effective developer-focused approach and its strong reputation among developers. I am optimistic about the company's outlook in the long-term and have a buy rating on the stock with an end-of-year price target of $80.
For further details see:
Twilio: Driving Digital Customer Engagement On A Global Scale