twilio is a hyper growth stock that has smashed the market's return since it came public however
this stock has faced huge selling pressure recently and is currently down more than
60% from its 52-week high does twilio deserve a spot in your portfolio here's everything you
need to know about this business my name is Brian Feroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring this video as of the time of this recording
i am a shareholder of twilio brian stofel is not that's right brian but let's dig into what this
company's all about today twilio's worth about $31 billion dollars if you look for it it trades
under the ticker symbol t-w-l-o twilio's mission statement is to fuel the future of
communications this is a company that understands mission statements because this is simple
inspirational and optional great job i agree brian but what does this company actually do well twilio
is a software as a service company that helps businesses communicate with their customers
whether it be via text message voice email or video yeah twilio's business is fairly complex and
hard to understand so here's the easiest way to think about it say you're a software developer and
you're building a website or an app and you want to build into your app the ability to communicate
with your customers via text message phone call or video chat how do you do that well you could build
those products from scratch and spend thousands of engineering hours and potentially hundreds of
thousands or millions of dollars doing that or you can just buy those tools off the shelf from twilio
embed them into your products very easily and boom you are instantly communicating with your
customers and it's worth pointing out that you can communicate with them in a number of different
ways for instance twilio has an identity solution where you can use the tools to verify that someone
is who they say they are so if you ever logged into a website and were asked for multi-factor
identification to insert a code that was sent to you by a text message the odds are really good
twilio was the one behind the scenes powering that transaction but it doesn't stop there twilio's
tools can be used for a number of things they have an intelligence platform that allows for
communication automatically with customers and orchestration in other words you can
plan out a marketing campaign or if it's election season a political campaign using twilio's tools
you can also use twilio's advanced communication platform to build automated bots that answer
customer questions whenever they reach out to you and the important thing to note is that because
twilio has built such an extensive platform you can communicate with your customers in just about
any medium whether it's text message voice chat video even on whatsapp and facebook messenger
the bottom line for me is if you're a customer and you want to find ways to communicate with
your own customers twilio provides a plethora of software-based tools that make it easy to do
just that so let's dig into the actual business model as we already mentioned this is a software
as a service company they have a usage-based model so every communication that you send out
you have to pay for and they have a dollar based net expansion rate of a hundred and thirty percent
now twilio has been rapidly adding customers for years however doing so has cost the company dearly
on the sales and marketing line for that reason we think that this company's customer acquisition
costs are very high when it comes to customer demand it's a little bit difficult to gauge
because we've never been through a true recession during the pandemic the company's tools actually
became more important because face-to-face interactions weren't possible that said
we think in general this is a must-have tool that is recession-proof and because communication is an
ongoing mission-critical task the vast majority of this company's revenue is recurring in nature
turning to the company's moat let's first talk about the network effect brian and i actually have
slightly different opinions when it comes to this the super network that twilio has developed since
its inception is what powers the ability to send those messages to all those places and the company
claims that it gets more powerful with every data point it collects therefore i think this is
a medium network effect mode whereas brian thinks it's more of a weak one however we both agree that
the company's switching costs are very high once a customer and developer gets used to using these
tools it becomes hugely onerous to switch away to a different provider next it's worth pointing
out that twilio's key customers are the engineers that are building these apis and in that community
twilio does have a bit of brand value and if you look back at this company's growth and customer
accounts and spending per customer it's obvious to us that this company's moat is expanding over time
so let's turn to financials when we look at the company's top line sales growth it is fantastic
growing at 58 per year over the last three years however it's worth pointing out that
acquisitions play an important role in that growth twilio's gross margin has bounced around a bit in
part due to those acquisitions but this company's recent consolidated gross margin was just under 55
management thinks that they can actually get this number to 60 over time looking at the bottom line
there's been a lot of red the company has had no problem reinvesting in itself to grab market share
and that has led to large gap losses the company is also burning capital on a free cash flow basis
however the losses on a free cash flow basis are far lower than they are on the net income line and
brian that's a really important thing to note because when you look at the company's balance
sheet it's very strong with over 5 billion in cash and less than a billion in debt and since those
free cash flow losses are so low the company is in no problem of running out of cash and because the
company is currently producing net income losses its returns on capital are currently negative
turning to company management twilio has something that we both love to see and that is a founder-led
business jeff lawson is currently the ceo and chairman and he has been at the helm ever since
twilio got its start twilio gets absolute glowing ratings on glassdoor.com that's particularly
impressive given that this company has a history of making acquisitions which tend to be correlated
with much lower glass store ratings and finally it's worth noting that we were a little bit
disappointed with the amount of insider ownership here especially since this is a founder-led
company it's worth pointing out that lawson does own super voting rights but when you add all
insiders together they own about five percent of the company which is worth one and a half billion
dollars today turning to long-term potential when it comes to optionality it's clear to
both of us that twilio has tons of it twilio got its start primarily in messaging which is still a
very important business today but the company has rapidly expanded out the number of products and
tools that it offers to customers as brian pointed out the company got its start in text messaging
but as you can see by the revenue mix over time it is diversified greatly and we think there's
still room for it to diversify moving forward in terms of operating leverage twilio has tons of
it available especially given the large bottom line losses management has stated that over the
next two years they're going to focus from just growing the top line to growing the bottom line
that could lead to outsized growth and non-gaap profitability and free cash flow turning to the
addressable market it's worth noting that the company believes its tam has grown extensively
over the past five years it was just 46 billion five years ago and it believes that by next year
it'll be worth 110 billion now some of this growth has come via acquisition but it still underscores
how large the opportunity is here now as we stated multiple times a lot of that growth including the
growth in tam has been because of acquisition so not all this company's growth has been organic
in nature that is a risk for investors to keep their eye on moving forward despite
twilio's stock falling more than 60 percent from its all-time highs it has still been an
excellent holding since it came public returning 450 percent for investors versus the markets 145
percent twilio also has a history of walloping wall street's estimates on the top and bottom
line including doing so four times in the last year and given all the information we provided
with the company's acquisitive nature it's not surprising to see that they are not returning cash
to shareholders turning to risks there are a bunch for investors to keep in mind first we'll focus
on the competition twilio is the far and away market share leader in the category it competes
but it does have numerous competitors such as message bird and nexmo it's also worth pointing
out that concentration used to be a risk for the company in fact it lost uber as a customer and at
the time uber provided over 10 percent of revenue the company has since diversified and grown away
so that it's less of a problem today twilio share count has risen sharply over the last couple years
due in part to acquisitions and extreme levels of stock-based compensation it's also worth pointing
out that this is a somewhat difficult business to follow as you dig in you have to follow all the
different acquisitions the company has made and it also creates complicated financials that you
really need to spend some time to wrap your head around there's also an outside force for investors
to be aware of and that is political spending makes up a pretty big chunk of the company's top
line during heavy spending years that could make the company's year-over-year financials look wonky
depending on if it's a spending year or not and finally despite the fact that the stock is down 60
from its highs it's still relatively expensive trading at about 22 times gross profit and 11
times sales that valuation is clearly indicating that investors are expecting strong top line
and bottom line growth over the next couple years if that fails to come through
look out below so given all this information what should investors look for well the first thing is
organic growth with the emphasis on organic we have no doubt that acquisitions will help
juice that growth but we want to see the underlying core of the business continue to grow
second pay attention to that dollar based net expansion rate we want to see that customers not
only stick around but they continue to ramp up their spending over time and finally we want to
keep our eye on free cash flow and also margins the company has said that they expect to be
generating net income moving forward but what we're really interested in is free cash flow
if they can bring in more cash in their spending it lends credibility and sustainability to this
business model so how did twilio score on our investing checklist the answer there is pretty
good on my investing checklist this company got a 76 that's an impressive number given that it's
not yet producing profits or free cash flow once those appear this company could move into my high
quality business category and on my framework it got a 10 and this is a marked improvement from
years past when it had heavy marks against it for its concentration issues at the same time i still
don't own the stock but even though you don't own it we've just made our call so we're going
to head on over to stockcard.io to hold ourselves accountable all right so here i am in stock card
i'm in the anti-fragile portfolio which is brian stoelfel's thumbs up portfolio i'm going to enter
the ticker symbol which is twlo i'm going to do a buy decision we're recording this on wednesday
march 30th this is a 174 stock and i'm gonna buy six shares and the score on your system was a
10. then i'm going to head on over to my quality checklist which is the brian for all equality
checklist and i'm going to do the exact same thing and while brian does that we want to
remind everyone that you can go to stockcard.io and see both of our portfolios that include all
of the picks that we've made here on this youtube channel also we have the beat the brian's contest
where you can pick five stocks you think will do the best between now and the end of 2022 and if
you come in first place you have a chance to earn up to 1 000 enter now because brian and i started
at the beginning of the year and our stocks have gone down you've got a really good chance
of having bragging rights over us well there you have it there's reasons to be bullish and there's
reasons to be bearish on twilio i'm gonna continue to hold my shares from here and while i gave it a
thumbs up in my portfolio i'm gonna watch from the sidelines in real life did you like this format
if so please give this video a thumbs up and let us know in the comment section below brian's out