Twilio IPO Offers Impressive Growth At Reasonable Valuation

  • The communication PaaS provider, Twilio confidentially filed for IPO and is expected to go public in 2016.
  • Fidelity recently marked up its investment in Twilio by 31% while other investments in Dropbox and Snapchat were marked down.
  • Twilio grows its top-line in 70% CAGR range with 55% gross margin and impressive valuation.
  • Twilio’s expected IPO price and P/S ratio ranges offer an attractive investment opportunity.

The cloud communication service provider startup Twilio is expected to go public in 2016 after it had confidentially filed for IPO at the end of 2015. The JOBS Act of 2012 enables emerging growth companies with less than $1 billion dollars in annual revenues to confidentially file for IPO and keep their financial information sealed for 21 days before the IPO road show. This is a commonly used process that allows startups to sense the reaction from potential investors and market participants before proceeding to a full-blown IPO process. In the past, companies like Twitter (NYSE:TWTR), GoPro (NASDAQ:GPRO) and Square (NYSE:SQ) used this IPO track by pursuing that process; we understand that Twilio generated less than $1B in annual revenues.

Twilio was founded in 2007 and offers application programming interface (API) services that enable developers to add voice, video, text, and picture messaging to any app in a simple way. Twilio uses AWS infrastructure to offer telephony services in the cloud that are very commonly used in many popular apps like Wal-Mart, e-Harmony, Hulu, Uber, Airbnb, eBay, Shopify, Salesforce and many more. In July 2015, Twilio raised $130M in Series E funding round at a valuation of $1B and entered into the one-billion dollar startup club that includes the most valuable startups in the world like Uber, Snapchat, Airbnb, Palantir, SpaceX and more.

After the market had started declining last year, mutual funds firms, Fidelity and Blackrock started to reevaluate their investments in privately held tech companies. The most vocal outcome from this re-evaluation was the markdown of the investment value in Dropbox and Snapchat, two of the top ten most valuable unicorns. However, in a recent report published by Fidelity, the mutual funds firm valued its stake in Twilio 31% higher than it was evaluated in the series E round and reflects a $1.3B valuation for Twilio.

Since its inception, Twilio has raised more than $230M in six equity funding rounds between January 2009 and July 2015. As shown in the chart below Twilio’s preferred stock price increased every funding round, and its latest price reflects a P/S ratio of 7 which rose a bit to 9 using the marked up valuation according to Fidelity.

Twilio_chart 1_020716

Compared to many startups that raised pre-IPO rounds at a double-digit P/S ratio, this is an attractive valuation. A further look into Twilio’s financials reveals a startup that generates larger amounts of revenues each year with higher gross profits and improved margins as shown in the chart below.

Twilio has a strong customer list that varies from prominent startups like Uber, Lyft, Airbnb, MongoDB, and Hulu to large caps like Wal-Mart, Coca-Cola, Home Depot, EMC, and eBay. The long and diversified list of customers is one of Twilio’s strengths that also attracts new customers and enables the company to continue to grow its top line revenues.

Twilio_chart 2_020716

Twilio’s pricing model offers low prices per minute of voice/video/conference calls and small per-message price, with unique discounted plans for high volume usage. This pricing model encourages users to scale their business and Twilio provides continuous support as they grow—targeted to keep the customer at Twilio during its growth process.

As mentioned above, Fidelity marked up its Twilio investment by 31%, which reflects a $1.3B valuation for the company and a $14.8 preferred share price, which provides a P/S ratio of 9 to Twilio. This is likely to be the bottom end of the IPO pricing range. The high end of the range adds an additional 20% on top of Fidelity Markup, according to recent tech IPOs, where investment firms had received a 20% guaranteed return from the company (by including a ratchet mechanism in the prospectus). The top of the range reflects a $1.57B valuation for Twilio, a $17.78 preferred share price, and an 11 P/S ratio. Twilio’s expected pricing range of $14.8 to $17.78 reflects a P/S ratio range of 9 to 11, which is an attractive valuation for a prominent growing startup.

As more and more companies add communication features to their apps and websites, the demand for Twilio’s services will increase. The expected growth in demand for communication Platform-as-a-Service (PaaS) suggests a promising future for Twilio. With an attractive valuation, a 70% top line CAGR, a 55% gross margin, and a bright future, Twilio’s IPO looks like an opportunity in which investors should participate.

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