Twilio (NYSE: TWLO)
released its fourth-quarter earnings yesterday after the bell, blowing away revenue and earnings expectations. Revenue was up 65% yoy to $548.1 million vs expectations of $454.8 million. The cloud communications company recorded a surprise profit of 4 cents per share against estimates of an 8 cents per share loss. Shares went up more than 11% after hours and looks like they will open at fresh all-time highs.
Twilio shares have more than quadrupled since the beginning of 2020 as the pandemic has been very kind to lead cloud companies. But Twilio, which provides tools for developers to add text, call, email, and other functions into applications, isn’t going to fall off a cliff post-pandemic. Far from it, in fact.
Revenue Growth is Accelerating
Sixty-five percent revenue growth would be impressive enough on its own, but Twilio’s revenue growth has actually accelerated over the last three quarters. It was up 46% yoy in Q2 2020 and 52% yoy in Q3 2020.
Twilio said it expects revenue of $526-536 million in Q1 2021. The midpoint would equate to 46% yoy growth – which would be a slowdown. But there is a good chance the company will beat those projections; Twilio has a history of beating revenue estimates.
Of course, revenue growth is unlikely to continue accelerating for more than another quarter or two – if that. But if revenue grows at, say, a 30-40% CAGR over the next few years, shares would likely continue appreciating.
There is reason to believe that could happen. On the Q4 earnings call, CEO Jeff Lawson pointed out that, “According to IDC, investments in digital transformation will nearly double by 2023 to $2.3 trillion, representing more than 50% of total IT spending worldwide. And Deloitte recently released a report stating that during the next 18 to 24 months, they expect to see leading companies embrace the bespoke-for-billions trend by exploring ways to use human-centered design and digital technology to create personalized, digitally enriched interactions at scale.”
Why is Twilio Growing Revenue So Quickly?
The pandemic has made it necessary for companies to communicate with their customers digitally. A failure could do so is a death knell for a company in the early 2020s.
You probably aren’t surprised to hear that Twilio is acquiring new customers; the company added 21,000 active customer accounts in the second half of 2020. But you might be surprised to hear that Twilio is selling a lot more to its existing customers. Twilio’s dollar-based net expansion rate was 139% in Q4, which means that its revenue per existing customer increased by 39% in Q4.
Ideally, both metrics will remain strong. But even if one gets a bit weaker, the other could pick up the slack.
Shares Are Expensive
Twilio is trading at nearly 30x forward sales and the company is expected to barely turn a profit in 2021. Of course, if revenues grow at a 30-40% CAGR through the mid-2020s, that P/S ratio will come down a lot.
The seemingly endless growth in Amazon (NASDAQ: AMZN) revenue has created an environment where investors extrapolate revenue growth in high-flying growth stocks many years out. Some of the best investments are companies that end up growing revenues for longer than expected. But it’s hard to meet or exceed high expectations.
How Should You Play Twilio?
It’s impossible to know whether Twilio will exceed or fall short of expectations, but the risk-reward still seems favorable at current levels.
But this is the type of investment that could either double or dip 20%+ over the next year. If you want to get in, however, you shouldn’t bet the house. Fortunately, a small investment could be enough to bring you large gains if things work out for Twilio.
That said, you might want to wait for a small pullback before getting in. A lot of investors have doubled, tripled, or quadrupled their money with Twilio over the last 13+ months; we could see some profit-taking tomorrow.
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