Todd Shaver chose Twilio (TWLO) as one of his favorite ideas for 2019 for his top-performing advisory service BullMarket Report. The stock has since risen 53%. Here's his latest update on the cloud software firm.
Twilio (TWLO) dominates the Cloud Communications Service market. Its innovative service and meteoric growth rate (80% YoY last quarter) are so impressive that unlike most midcap tech stocks, Twilio was actually in the black through 4Q18 (up 16%). With a total addressable market that continues to expand, we were (and still are) confident those gains will continue throughout 2019.
Twilio already corners that market with big names like Uber, Lyft and WhatsApp as customers. And the fact that the company’s top-10 clients now make up 20% of total revenue (down from 30% since the company’s 2016 IPO) illustrates customer diversification, and implies continued market share capture.
And the best news is, the company hasn’t even begun to penetrate the small business market. As more and more businesses offer mobile and cloud-based platforms, they will need to communicate with customers seamlessly and efficiently.
Building your own Application Programming Interface (API) takes time and costs money, so Twilio adds a ton of value for growth-stage firms looking to communicate via the cloud.
The Sendgrid acquisition adds a powerhouse mass-emailing platform to Twilio’s already impressive roster of product offerings (Twilio Flex for call centers is an example of a recent product innovation).
Sendgrid also adds $150 million in annual revenue, and the company’s 75% gross margin lifts Twilio’s lower 54% gross margin to a healthier 60% level. And Sendgrid’s functionality fits like a glove into Twilio’s platform — the two are API-based, and Twilio was in desperate need of mass-email capabilities. We expect Sendgrid to greatly enhance Twilio’s attractiveness vis-à-vis competitors moving forward.
The bear case for Twilio is that with a high PE ratio, the stock is too expensive. Well, the stock is expensive, but it’s expensive for a reason! Twilio has posted four straight quarters of revenue growth acceleration, and that’s from a starting point of 50% growth.
Last quarter saw 80% growth, which the bears say can’t hold – but this quarter is tracking for the same number. With Total Addressable Market (TAM) expansion, even if growth rates dip (to be expected), they will still remain robust enough to warrant a steep valuation. Another positive forward-looking indicator is EPS growth, which is projected to break 150% YoY in 2020.
This is significant, because the market is looking 12-24 months out when analyzing Twilio’s business. The TAM will grow rapidly over that time as more small and medium-sized businesses adopt cloud-based communications. Twilio is one of only a handful of companies with over $1 billion in market cap that is expected to grow earnings by at least 150% in 2020.
The stock is up 56% YTD, and we believe there is more to come. Twilio’s business model adds immense value, and the company continues to innovate – a true market leader. Revenue growth will continue apace as the TAM expands and more businesses are brought into the cloud. We’re long Twilio throughout 2019 and beyond.
