TWLO Update: 2-22-2021

    Twillo (TWLO) delivered both sales and earnings above expectations last quarter, and the recent acquisition of Segment is a very smart move to enlarge the total addressable market and strengthen the company’s competitive position. Execution is world-class at Twillio. Valuation is the main negative in the stock, but it is within an acceptable range at these prices.

    The Update

    Total revenue amounted to $548.1M during the quarter, up 65% year over year. The number includes $23M from Twilio Segment starting on November 2, 2020. Management also said that political traffic during the elections added $22.7M to revenue.

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    The company ended the quarter with more than 221,000 Active Customer Accounts versus 179,000 Active Customer Accounts as of December 31, 2019. 

    Dollar-Based Net Expansion Rate was 139% for the fourth quarter of 2020, compared to 125% for the fourth quarter of 2019. This does not include any impact from the Segment acquisition. 

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    In case you are not familiar with Segment, it is a leading customer data platform that enables developers to leverage customer data in areas such as marketing, sales, and customer service. Twillio and Segment together can be a powerful combination in terms of both enlarging the addressable market and strengthening the company’s competitive position.

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    When considering the risks, Microsoft (MSFT) is launching its Azure Communication Services that can compete against Twillio in the future. This is a factor worth monitoring, but it is not hurting the investment thesis in Twillio in any material ways right now. 

    The company has recently issued $1.5 billion in new shares, which can hurt the stock price in the short term. However, issuing shares after an extraordinary quarter is the right thing to do, and it shows that management understands how to play the game. 

    The stock is valued at 26.5 times revenue estimates for 2021, in line with other high-quality stocks with similar growth rates. I don’t think Twillio is overvalued, but it could pull back if we see a contraction in valuation ratios for growth stocks in general. This is perhaps the biggest negative for the stock.

    The Timing

    The chart looks good to me. Twillio is in a clear uptrend and not too extended from the 21 days exponential moving average. Performance in the short term will obviously depend on how growth stocks in general behave, but the fundamental drivers in Twillio remain intact from a long term perspective.

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    The Big Picture

    Twillio reported very strong numbers for the fourth quarter of 2020, and the company is making the right moves in order to position itself for further growth in the years ahead. The chart is acting well too. 

    The recent share issuance is no problem to me. The competition will most probably increase in the near term, but Twillo comes second to none in terms of competitive strength, technology, and innovation. 

    Like usually happens in these cases, valuation is the main risk factor to watch. Twilio is not cheap at all, but it is still reasonably priced for such a high-quality business. The stock remains in the portfolio with a long term horizon, and any pullbacks down the road can be considered buying opportunities in this high quality business.

    Disclosure: I am/we are long TWLO.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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