- Twilio sits perfectly positioned at the nexus of cloud, mobile and messaging.
- It is developer-focused, providing only the tools to build custom comms systems.
- Though growth is strong, the P/S valuation is too high to move in right away.
Twilio (NYSE:TWLO) is a cloud communications company that sits at the crossroads of three very important technological areas. If you are asked to create a list of companies that got into the right place at the right time then you possibly have to start with Twilio. The communications platform that it is building is clearly focused on the three technology thrust areas of the current decade: Cloud, Mobile and Messaging.
It is one thing to be in the right place, but the whole positioning can be useless if you are not able to execute your plans. Fortunately for Twilio, the company has been able to steadily increase its platform’s effectiveness by adding services that are highly useful for companies and thus will stay in demand for a long time.
With a clear developer-focused strategy, the company has built services one after the other. Now, at the core of its services lies the APIs for messaging, voice, video and authentication. To put it simply for non-tech users, Twilio has built a platform that will allow its user to quickly build and deploy communications-oriented applications.
In the first six months of the current fiscal Twilio nearly doubled its revenues from $71.31 million last year to $123.85 million, which is not at all a surprise considering the segments their products serve. But not everything is rosy for the company as their bottom line is still deeply in the red, reporting a loss of $17.4 million during that period.
Twilio, which went public in June this year, saw its stock blaze through its IPO price of $15 on the first day of trading, closing that day at $28.79, a 91% jump. But the problem was, the stock continued to rise in the subsequent months and is now trading around $60, giving it a market capitalization of nearly $5 billion. Even if the company hits the $250-$300 million range in annual sales this year, at $5 billion the company is trading at a mind boggling 20+ times sales.
Salesforce (NYSE:CRM) is another hyper-growth story of this decade and a great parallel to think about. The CRM leader of the world saw its revenues climb from $497 million in 2006 to $6.6 billion in 2016. The company kept doubling its sales every two to three years. It is highly likely for Twilio to follow that path if it can keep adding services wider and deeper, the same way Salesforce entrenched itself in the CRM market. Salesforce is trading at 6.5 times its sales, a high number which has plenty of room to adjust downwards, but hasn't done so as the company kept nurturing its sales.
Twilio has plenty to prove before its gets there. They have a strong start and they are in the right space. But at +20 times sales, there is very little room for error; in fact, the chances for a downward correction are very high before it can start the upward journey again. If you want in, you should wait for a better opportunity than jump in at this price level. It's a great company to put on your watchlist for now.