I first wrote about Twilio in this blog in January 2020. Since then, Twilio’s stock price is up by more than 150%. Although Twilio is a big winner over that time frame, its stock price did fall by more than 17% last Thursday (28 October 2021), a day after it announced its 2021 third-quarter earnings report.
With the recent dive in its price, I think Twilio’s shares are back at a valuation that could give joy to the long term shareholder.
What the numbers say
The headline numbers for Twilio in the recent report were actually really solid. Revenue rose 65% year-over-year to US$740 million. Organic growth, which excludes one-off revenue and revenue from recent acquisitions, was a solid 38%. On a quarter-on-quarter basis, Twilio’s core business also grew by 2.7%.
The dollar-based net expansion rate, a metric that shows how much more existing customers spent on Twilio’s core business, was 131%.
This is clearly a company that is still growing. For the fourth quarter of 2021, management expects revenue of between US$760 million and US$770 million, implying year-on-year growth of around 45% to 47% after excluding one-off traffic in the year-ago period that’s related to the US presidential elections.
More importantly, Twilio’s management is still very confident of its long-term prospects. Twilio’s current CFO and new COO, Khozema Shipchandler, shared the following during the latest earnings conference call:
“When we look to 2022 and beyond, we remain very confident about our ability to deliver 30%+ annual revenue growth over the next three years.
Overall, we delivered very strong results in the third quarter, and we are well positioned for a strong close to the year. We’re excited about the large opportunity ahead as we continue to help companies around the world and across industries reimagine their customer engagement.”
Lapping its Segment acquisition
Twilio has also made important acquisitions in the last couple of years. Segment, a customer data platform that helps organisations collect, clean, control, and organise their customer data, is one of Twilio’s key acquisitions in the past year.
Segment is growing even faster than Twilio’s core business. In the third quarter of 2021, Segment delivered US$52 million in revenue, up an impressive 12% sequentially. If Segment can keep that up, it will be growing revenue at more than 50% annually.
Twilio does not include Segment in its calculation of organic growth as Segment was only acquired in late 2020. But by the first quarter of 2022, Segment will be included in the organic growth contribution and should accelerate Twilio’s organic growth starting next year.
Twilio’s business outside of the US is also growing significantly faster than in the US, a good sign that Twilio is gaining traction beyond its core markets. International revenue in the third quarter of 2021 contributed 33% of revenue, up from just 27% in the third quarter of 2020.
I think Twilio’s growth outside of the USA is a testament to the company’s execution in its go-to-market strategy internationally.
As Twilio’s international revenue scales, it should become a bigger driver of growth for the company over the long term.
Despite strong third quarter results, Twilio’s stock price plummeted, as I mentioned earlier. Although I can only speculate on the reasons, I believe the lower organic growth projection for the fourth quarter, and the low sequential growth in the third quarter, are the main culprits for the sell-down. The announcement – released concurrently with the earnings report – that Twilio’s long-time executive, George Hu, would be stepping down as COO, may also have been one of the factors.
These said, the sell-off has made Twilio shares much more attractive. Twilio now trades at a market cap of around US$50 billion. The customer engagement company has a revenue run-rate of US$3 billion (based on the revenue for the third quarter of 2021) and thus trades at around 17 times annualised revenue.
Twilio’s management is projecting revenue growth of at least 30% per year over the next three years. At the low end of the forecast, this should already lead to revenue more than doubling to US$6.6 billion by the last quarter of 2024.
Given its gross margin of around 57%, I think Twilio can achieve a steady-state free cash flow margin of around 20% eventually. And as a high-growth software company, I expect Twilio to trade at more than 50 times normalised free cash flow by then, which should give it a market cap of more than US$65 billion.
Bear in mind that these numbers above are based on 30% annual revenue growth, which is at the bottom of management’s expectations. I believe Twilio should grow even faster than 30% as Segment is growing at 50% and Twilio’s core business dollar-based net expansion rate is still above 130%.
In addition, the market can easily give Twilio a much larger valuation multiple if Twilio is still projecting healthy growth then.
With the recent drop in Twilio’s share price, the stock looks attractive again. Jeff Lawson, the founder and CEO of Twilio, is a great operator and technical leader and appears to be skillful with capital allocation. For instance, he has made excellent decisions to grow the company through astute acquisitions and to integrate these services with its core offering (Segment is a good example).
Lawson described his vision for the company in the recent earnings conference call:
“The customer journey is a conversation, from when a customer first meets a company, all the way through becoming a customer, buying, repeat buying, returning, getting support or whatever else the customer needs. All of that is one conversation between the customer and the company. Our platform provides the tools for companies to manage every part of that journey, with Twilio Engage, Frontline, Messaging X, Flex and more. One conversation on one platform to unlock endless possibilities. That’s the Twilio customer engagement platform.”
Given this vision, I think Twilio is in the early innings of its long-term mission and should be able to grow for years to come.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of Twilio.