Everyone loves a growth stock. These stocks grow faster than the market average. If you are a lucky investor, you find them once in a while. There are growth stocks and then there’s Twilio (NYSE: TWLO). A cloud communication, SaaS (software as a service) stock that was once classified in the hyper-growth category.
TWLO stock was trading at $100 levels at the start of March 2020. In February 2021, it hit $435. From July 2021, it started to drop and never stopped dropping. It closed on April 18, 2022, at $132. Can it move up again or is its story over?
Twilio’s business model
Imagine that you are a business that runs an app or a website. You want to communicate with your customers via a text message or video chat or phone call. You can build all of these lines of communication on your own (which will be hideously expensive and time-consuming). Or you can use Twilio APIs (Application Programming Interfaces) that will do the job for you in a fraction of that time and cost.
That sounds pretty cool. Twilio’s tools also let your business automate responses to your customers so that they are always engaged (in this world of instant expectations). Twilio was one of the first businesses in this space and counts companies like Lyft (NASDAQ: LYFT), Airbnb (NYSE: ABNB), and eBay (NASDAQ: EBAY) as its clients.
It ended Q4 of 2021 with 256,000 active customer accounts. Twilio’s revenue for Q4 came in at $842.74 million, a 54% jump from the corresponding quarter in 2020. It beat estimates handsomely to the tune of $73.3 million. Despite these figures, the stock dropped from over $200 levels to its current price.
The challenge for TWLO stock
Twilio’s gross margins have continuously been falling. It stood at 58% in FY2019, 56% in FY2020, and 51% in FY2021. Comparatively, net losses have been increasing continuously from $307.06 million in FY2019 to $490.98 million in FY2020 and $949.9 million in FY2021.
While Twilio had the first-mover advantage, the company is facing competition from players like Vongae, MessageBird, Plivo, Vidyo, and a number of others. There is always the risk that companies could simply use Twilio as a stop-gap measure while they build their own products from scratch. Then, there is also the added pressure of rising charges from major carriers like Verizon.
But perhaps the biggest challenge is that Twilio doesn’t have the assurance of recurring revenues. It charges its clients for the usage of its tools. The more you use, the more you pay. However, this also means that if a business doesn’t use Twilio tools for a month in a quarter, its revenues drop by a third.
Twilio is slowly moving away from its original business model of usage-based revenues to subscription-based revenues.
In November 2020, Twilio acquired Segment, a customer data platform company, for $3.2 billion. The synergies between the companies have only begun to bear fruit in the latter half of 2021.
The company offered its clients a tool called Twilio Segment which was based on subscriptions. For the quarter ended September 30, 2020 77% of Twilio’s revenue came from usage-based fees. For the corresponding quarter in 2021, the number was down to 72%.
When you look at stocks like Twilio, you have to accept the fact that these stocks are going to be very volatile. Hypergrowth stocks are not for investors with a weak stomach as they could suffer multiple hits before making it big.
Twilio’s market cap is about $24 billion dollars. Analysts have given the stock an average target price of $315.69, a potential upside of over 130%. If you believe that there is a future in making it easy for businesses to communicate and engage with customers, Twilio might be one of the best bets you can make.