2023-04-26 05:51:42 ET
Summary
- Trading at 3.3x EV/GP, Twilio's stock is in the bargain in bin.
- TWLO is transforming itself from communications platform into customer engagement platform.
- While it faces some headwinds, the bar has been set pretty low.
While facing some headwinds, Twilio ( TWLO ) looks too cheap while expectations are not very high. That's a good recipe for a rally.
Company Profile
TWLO operates a cloud communication platform that lets developers embed voice, messaging, and email into customer-facing apps. The company's Communications segment currently has four core products: programmable messaging, programmable voice, email, and account security. All the core products are usage based except email, which is subscription based.
Its programmable messaging product is an API that facilitates the sending and receiving of various messages, including SMS, MMS, toll-free SMS, high-throughput toll-free SMS, and over-the-top messages. The product is used by clients for such things as order confirmations, account notifications, marketing, and customer care, among other use cases.
TWLO's Programmable Voice product, meanwhile, lets developers build solutions to make and receive phone calls through apps, browsers, phones, or anywhere that can make a call. Its software works with both traditional phone networks as well as VoIP (voice over internet protocol).
The company's SendGrid Email API helps bulk emails reach their in-box destinations. Clients use the platform for things such as marketing, shipping notifications, password resets, and sign-up confirmations, among other use cases. In addition, the company's Verify product helps add security features such as second-factor passwords sent to users via SMS, voice, email or push notifications.
The company also has several emerging products it groups together in its Data & Applications segment: Segment, Flex, and Engage. These products are primarily offered on a subscription basis.
Opportunities and Risks
TWLO is in the process of transforming itself from solely a communications platform into customer engagement platform with new products from its Data & Applications segment. This transformation was bolstered through its 2020 acquisition of Segment for $3.2 billion. Segment is a customer data platform that helps standardize data collection, unify user records, and route customer data.
The vision is to unite customer communication with customer data to provide more personalized experiences that helps the customer journey. The company's first product in this area is Engage, which lets marketers create personalized campaigns that can be delivered through text, e-mail or other channels.
Discussing the product at a Morgan Stanley conference in March , CEO Jeffrey Lawson said:
And so Engage is our first product that brings together, here's the customer and what are you going to do when you know this stuff about them, you're going to trigger a campaign to go send them a text message, that e-mail, that phone call, you're going to do something differently because you now understand the customer better and that reaching out and touching the customer is what Twilio does.
And so it's the first product that really brings together the best of Segment and the best of Twilio into one pane of glass for primarily for marketers. And that's just the first of many such things that we're doing. And I think what we've seen so far is a really good ability to take a customer who's using our CDP, and we've talked about we have tens of thousands of customers in our data and apps business. And then say, "Oh, by the way, what do you want to do with that data?" And sell them Engage. And the product has only been in GA for 4 months, but we announced on our earnings call, said large bank had already adopted it, among many other customers, right? So we're off to an early start. The product is in market for 4 months, but we're already seeing that cross-sell from like the CDP customer who's built those profiles to now activate the data that's in those profiles to use the rest of Twilio's channels is starting to come together really nicely. So really excited about that."
TWLO is looking to invest and drive accelerated growth in its new Data & Applications segment, even if it has to lose money in the short to medium term. However, it is looking for its much larger Communications segment to be a profit engine for the company to allow it to invest in the growth of Data & Applications.
As part of turning its Communications segment into a profit center, it has cut 26% of its workforce since Q3 and reduced layers of management at the company. It's also cut back on employee perks and will look to reduce its real estate footprint. Management has also said it is looking for Communications to have a more product-led growth strategy. In addition, the company is looking to transition some employee compensation away from stock-based compensation and towards cash.
The company's board also authorized a $1 billion stock buyback, with management saying it wanted to repurchase $500 million in stock over the next six month. Lawson said he would also look to buy $10 million in shares on the open market, which he did in late February.
Now cutting your workforce by a quarter and reducing employee perks also comes with risks. It likely doesn't lead to great morale, and it also means less quota-carrying reps. Combine that with macro headwinds, which is leading to elongated sales cycles, and you have a more difficult growth environment.
Much of TWLO's business is also usage based, so during periods of economic weakness, that usage can certainly go down. Its dollar based net retention was 110% in Q4, and while still solid, that is well below where it has fallen historically. The prior quarter it was 122%, and it was a whopping 139% in Q4 2020.
Valuation
Some bulls like to value TWLO on an EV/S multiple, which would be 1.5x. However, TWLO doesn't have SaaS-type margins to justify using that type of valuation metric in my view.
Using an EV/gross profit metric, it trades at 3.3x. I think this is probably the best way to value the company.
It is projected to grow revenue by 12.6% this year, and 16.1% in 2024.
When you compare the company's EV/gross profit versus names with similar revenue growth, it trades at a very large discount to names like Okta ( OKTA ) or HubSpot (HUBS).
Conclusion
TWLO has certainly had some issues in the recent past, but I like the transformation the company is trying to undertake. To me it makes a lot of sense to be able to take siloed data and use it to create better customer communication. It some ways, it reminds me of what ServiceNow ( NOW ) is doing in the customer service call center space when I wrote about that stock in March , but TWLO is looking to do it more proactively on the marketing side versus reactively on the customer service side.
Trading at under 3.5x gross profits, TWLO is just too cheap in my view. The bar has been reasonably set for both Q1 and the year, and I think the company should be able to jump over relatively modest expectations. The 14-15% revenue growth the company forecast for Q1 would be the lowest in its history.
I'd set a $75 price target, which is about a 5x EV/GP multiple, and then go from there.
For further details see:
Twilio: The Stock Is Too Cheap