Summary
- TWLO's moat has grown stronger. With many companies racing to integrate ChatGPT-like capability into their tech offerings, TWLO has already offered an API language model since 2020.
- No matter voice or text applications, the integration possibility is unlimited across SMS, online messaging, voice calls, emails, and contact centers, amongst others.
- TWLO's forward execution may be boosted over the intermediate term as more consumers join the AI hype and the restructuring strategy pays off.
- Its profitability is not far away in our view, with the company expected to generate impressive adj EPS of $0.18 by FY2023 and $2.16 by FY2025.
TWLO's Moat Only Grew With ChatGPT's Popularity
Many had questioned Twilio's (TWLO) moat as a communication solution provider, due to the meteoric rise of ChatGPT's popularity over the past few months. Let us end the argument here, once and for all.
ChatGPT had not and could never be a threat to TWLO in our opinion, since the integration of GPT-3, an API language model, has been long offered by the company since August 2020, as previously introduced by Miguel Grinberg , a Python Developer for Technical Content at Twilio.
Notably, as a tech company providing customizable omni-channel communication tools, the GPT-3 integration had been offered as a value-added service depending on the needs of individual consumers. This naturally differed from ChatGPT's stand-alone platform.
The combined capabilities seem impressive, since the AI tool might be seamlessly integrated with Twilio Programmable SMS and Twilio Programmable Voice. As pointed out by TWLO engineers, one could "build a phone service to converse with an AI friend through text or voice call." Another use case proved that the API language model could be integrated with Meta Platforms' (NASDAQ: META ) WhatsApp, creating " Your Personal Michelin Star Chef " since September 2020.
Naturally, the opportunity might be immense in the consumer facing settings, since the GPT-3 capabilities could be customized by corporate engineers based on their specific requirements.
Could the recent buzz surrounding ChatGPT help TWLO? In our humble opinion, absolutely! With Microsoft (NASDAQ: MSFT ) and Alphabet ( GOOG ) ( GOOGL ) going all out in the AI-war, more tech companies and communication providers might be tempted to join in the hype as well. This might directly benefit TWLO, as a centralized API gateway across various communication channels.
Therefore, we posit that TWLO may potentially report a quick jump in active customer accounts in the intermediate term, with increased net dollar expansion due to the hyper-demand for conversational based customer service. It represents a notable tailwind for TWLO due to the revolution in consumer experience through the stand-alone platform and Bing alike.
This integration could certainly build upon TWLO's existing centralized customer record system, while enabling seamless real-time communication across SMS, online messaging, voice call, emails, and contact centers, amongst others.
Naturally, risks remain since the AI chatbot has yet to achieve accuracy, with potential legal issues from misinformation. This was made painfully apparent during the recent Bard mishap by GOOG and the disturbing development in Bing's Chatbot wanting to be a human. Naturally, no company could afford the reputational risk from similar issues associated with consumer-facing services. The ramifications could be disastrous in our view.
While GPT-3 may potentially improve moving forward, we remain uncertain if the platform could be sufficiently trusted to perform a stand-alone front line service , such as autonomously sending out messages or receiving phone calls for contact centers. We reckon the safety net offered by automated (predetermined) solutions may be preferred by many corporations, due to the inherent reliability and enhanced accountability, as opposed to organic humanlike interactions.
On the other hand, TWLO has been using AI "automated chatbots" as well, albeit in a more restrained manner. The company launched Twilio Autopilot , an AI communicational platform with full customization capabilities in October 2018. As with most AI tools, if not all, it was designed to work in conjunction with human intervention and in this case with contact center agents.
Even OpenAI had confirmed a similar system to ensure the AI model would generate text that was "coherent, accurate, and appropriate," while similarly being "safe and ethical:"
OpenAI acknowledges that its team monitors and curates the responses of GPT-3 on its website and in its documentation. This information is provided in the API documentation, as well as in the general information and frequently asked questions sections of the website. Additionally, OpenAI may have published blog posts or articles discussing the role of human curation in GPT-3's responses. (Mind Matters)
Interested readers should refer to the article, Found! ChatGPT's Humans In The Loop! , since it shows that "autonomous AI systems" might not be what they seem.
TWLO Product Offerings
Beyond the Autopilot and GPT-3, TWLO offers so many more capabilities, as seen on its website. As a result, its technological offerings are able to reduce consumer acquisition costs by up to -65% in some cases, which helps explain the company's stellar net dollar retention rate of 110% in FQ4'22 and 121% in FY2022.
In addition, TWLO continues to record stellar remaining performance obligations of $122.1M, with over 95% of these contract values to be recognized over the next 24 months. With the Fed expecting inflation rates to fall to 2% by 2024, we reckon the macroeconomics could be improved tremendously by then, lifting corporate spending and market sentiments alike.
As a result of this large movement toward AI tools, we have naturally turned even more bullish on TWLO's intermediate prospects, no matter how its consumers choose to integrate GPT-3 moving forward.
So, Is TWLO Stock A Buy , Sell, Or Hold?
TWLO 1Y Stock Price
It seems apparent that Mr. Market shared our assessment as well, since TWLO continued to record an impressive recovery of 76.5% to $75.45 since the November bottom of $42.74. The stock had broken through its previous resistance level in the mid $60s, potentially pointing to more volatility in the short term.
However, the optimistic FQ4'22 results shows the resilience of its business model and the excellent execution of its management team thus far. While the forward guidance might appear softer with a mid-point for FQ1'23 revenues of $1B against consensus estimates of $1.02B, it was neither surprising nor unique to TWLO, since it was attributed to tightened corporate spending from the uncertain macroeconomic outlook.
Notably, TWLO does not expect to achieve profitability on a GAAP basis until 2027 , with headwinds remaining through FQ2'23 due to $135M in impairment charges . However, the company seems highly committed to delivering on its operating margin break-even by the end of 2023, attributed to management's FQ1'23 guidance of adj EPS between $0.18 and $0.22, against the consensus estimates $0.01. It appears that its aggressive layoffs by -26% and office closures have been working thus far.
In FQ4'22, the company also generated adj gross margins of 50.5% , but improved adj operating margins of 3%, against FQ3'22 levels of 50.8%/-1% and FQ4'21 levels of 51.2% (adj gross margin) , respectively.
TWLO also continued to moderate its Stock-Based Compensation [SBC] expenses to $193.29M by FQ4'22, declining by -7.4% QoQ from $208.89M though expanding by +19% YoY from $162.34M. For now, we reckon the SBC expenses may moderately grow for the next few years, due to its lack of GAAP profitability. Nonetheless, the management has also guided a moderation in these expenses from 2027 onwards, attributed to the hiring freeze.
As a result, we are cautiously rating the TWLO stock as a speculative Buy here. Naturally, the stock is only suitable for those with higher risk tolerance and long-term investing trajectory. However, with a projected adj EPS of $2.16 by FY2025, we can not help but be optimistic.
Meanwhile, conservative investors may consider waiting for another mid $50s to $60s entry point at the previous December resistance/October bottom levels, since those levels may provide an improved margin of safety.
For further details see:
Twilio: GPT-3 Integration Since 2020 - Recovery Tailwinds Ahead