Twilio: Analyzing Revenue Trends

Rapid Recap

Here's a quote from my previous analysis of Twilio (NYSE:TWLO):

Here's the core of it: Twilio was able to over-charge customers and drive its revenue higher with this technique [relying on a usage-based revenue model]. But over time, the graphic [below] shows its customers figured out how to spend less with Twilio.

It's this insight that we are going to dig deeper upon. Here's why I struggle to get bullish on Twilio and remain neutral on this stock.

Why Twilio? Why Now?

Twilio is a customer data and communications platform. Its whole business model allows companies to interact directly with their customers. Its highly customizable Application Programming Interfaces ("APIs") have made it a popular offering amongst developers looking to communicate with customers.

How do you market your brand's message? How do you measure your brand's communication so that you can iterate the messaging? How do you gain visibility into your messaging?

Twilio provides APIs for building in-app chat functionality, for instance on WhatsApp, facilitating real-time communication between users.

The problem for Twilio is that during the pandemic years, in a low-interest rate environment, small- and medium-sized businesses were more than willing to invest in any infrastructure IT platforms. And they make up the bulk of Twilio's customer base.

But with time, SMBs have attempted to figure out cheaper ways of getting around their communication requirements. And this is what we'll discuss next.

Revenue Growth Rates Slow Down

The trend above is undeniable. Twilio growth rates are slowing down.

The best that investors can now aim for is for Twilio's comparables to start to ease up in Q4 2023. But even in that case, I believe we can assume that Twilio is unlikely to see around 20% CAGR in Q4 2023.

Meaning that, as we look out to 2024, Twilio is no longer going to be perceived as a rapidly growing company. And without that perception of Twilio as a rapidly growing company, investors will be unwilling to award it ''a growth multiple'' on its stock.

Put another way, Twilio today is priced at about 3x forward sales. That's not a heroic multiple by any stretch. One could make the case that it's a relatively petite multiple.

But that assertion is only true if it's compared with the multiple Twilio had when it was growing at a much faster rate. If we no longer see Twilio as a +30% CAGR company, but one that may or may not reach stably grow at 20% CAGR, then, paying around 3x forward sales already is a fair multiple.

What's more, as you can see above, since June, Twilio's multiple has already expanded significantly from around 2x forward sales to 2.8x forward sales.

In sum, with slowing growth rates and an already expanded multiple, investors will be looking toward its profitability to support its valuation. The topic that we'll now turn to.

The Pursuit of Promising Profitability

Here's a quote from Twilio on its profitability targets,

We've committed this year to profit in terms of throwing off on a profit this year. We've also committed to 300 to 400 bps of sustained growth year-after-year after this. And so we have also said that we feel confident that we can hit those growth goals in any macro environment. So we have our hand on the wheel in terms of moderating our spend. And our biggest source of spending, as you can imagine, most technology companies is headcount.

Twilio believes that it can get to 10% operating income profits in 2023. The problem for Twilio is that investors are now less interested in non-GAAP operating profits, where management's running costs are not factored in the costs of the business. Investors crave clean GAAP profitability.

And on that front, Twilio is still more than 3 years away. Twilio believes that it can get to GAAP profitability in 2027.

But what sort of GAAP profitability should investors expect? 1% GAAP operating profit margins? Maybe 3%? Realistically, I don't believe 3% of GAAP operating profits to be on the cards.

That means that investors are ultimately having to pay more than $10 billion market cap for a business whose clean profitability is still many years off and has to grow to support its valuation.

To be clear, I don't argue that Twilio is overvalued. Not at all. Simply that I can't see this stock as undervalued.

The Bottom Line

Twilio operates as a customer data and communications platform, offering highly customizable APIs that allow companies to interact directly with their customers. However, Twilio's CAGR has been slowing down, leading to a shift in investor sentiment.

As the perception of Twilio as a rapidly growing company wanes, investors may be less willing to award it a high "growth multiple" on its stock.

Additionally, Twilio's pursuit of profitability is a crucial concern. While the company aims for 10% operating income profits in 2023, investors are increasingly interested in clean GAAP profitability, which Twilio is still several years away from achieving.

As a result, investors may be hesitant to pay a high valuation for a business whose profitability is distant and uncertain, raising questions about the stock's perceived value.

Strong Investment Potential

My Marketplace highlights a portfolio of undervalued investment opportunities - stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued.

I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks.

Investing Made EASY

As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains.

• • Deep Value Returns' Marketplace continues to rapidly grow.
  • Check out members' reviews.
  • High-quality, actionable insightful stock picks.
  • The place where value is everything.