2023-05-31 09:00:00 ET
Summary
- Activist investor Legion Partners is reportedly interested in Twilio, potentially pushing for board changes and divestitures.
- Twilio's stock remains 85% below its all-time high, and CEO Jeff Lawson's supervoting shares arrangement is set to expire soon.
- Investors are likely eyeing divesting Twilio's low-margin communications platform, which is cyclical and could depress its valuation from an upward re-rating.
- However, Twilio's communications platform likely underpins its economic moat, which is critical to the other layers in its business model.
- Still, TWLO stock is cheap, even as it recovered from its May hammering.
Twilio Inc. ( TWLO ) stock saw a post-earnings surge yesterday (May 30), as The Information reported an activist investor interest in Twilio. Accordingly, Legion Partners has been " urging Twilio to make changes to the board and consider divestitures, among other moves."
The opportunity for the activist investor's participation in Twilio is timely. CEO Jeff Lawson's "supervoting shares arrangement is set to expire in less than a month." As such, Lawson will likely have much less influence moving forward to influence board decisions.
The positive initial post-market reaction suggests that the investors seem pleased with the move. Twilio investors have been hammered since TWLO formed its highs in early 2021 at nearly $460 a share. In addition, Twilio's weak guidance in early May saw TWLO threatening to re-test its October 2022 lows. However, dip buyers braved the selloff as they returned confidently to bolster TWLO's support levels.
Notwithstanding, TWLO remains more than 85% below its all-time highs, which could encourage more activist investors on board to drive more shareholder value.
The Information didn't specify any specific corporate action that could occur but highlighted the moves that could involve board changes and divestitures. I believe analysts and activist investors are likely assessing Twilio's low-margin communications business, which Lawson highlighted in a conference in May that it " will be a big mistake" to divest.
Lawson stressed that Twilio's communications infrastructure forms the backbone of its unified platform. As such, he articulated that the company could "unlock more value than the individual parts alone."
Lawson added that the advent and proliferation of generative AI lends credence to bolster the company's unified platform infrastructure. As such, it is expected to lead to more customized and personalized customer profiles, resulting in increased engagement over time.
I think it's a close call. Twilio's communications business is likely under siege as investors worry about its drag on the company's drive to chart profitable growth. Moreover, it is also cyclical and exposed markedly to macro pressures. As a result, it has led to unforeseen revenue volatility that could put more pressure on an upward valuation re-rating.
Therefore, investors likely see the opportunity to divest its communications platform and focus more on "predictable" SaaS-related revenue could lift its perceived valuation.
However, I think it's also critical for investors to assess whether they consider Twilio's communications platform as crucial in delivering its economic moat. Morningstar highlighted that Twilio's communications platform confers a " network effect " moat as the company builds upon its "foundation" layer. As such, it increases switching costs for Twilio's customers, encouraging them to stay with the company's communications platform.
As such, investors clamoring for the company to divest its foundational layer needs to consider whether it could effectively weaken its moat and lead to a vicious cycle of more intense competition in other layers.
I believe whether it's Legion Partners or other activist investors, putting more pressure on management is a constructive move. With management committed to focusing on a profitable growth trajectory, their involvement could benefit shareholders' interest, clarifying the company's investments and capital allocation.
While TWLO has recovered from its May lows, I assessed that its valuation is still reasonable. Seeking Alpha Quant rated TWLO's valuation with a "B" grade, suggesting it's attractive.
TWLO's constructive price action at its May lows suggests that dip buyers returned to bolster against a further selloff. While a near-term consolidation could occur as TWLO moves into overbought zones, I see a pullback as a buying opportunity.
Rating: Buy.
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Twilio: Rising From Potential Shareholder Activism