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Twilio Needs to Figure Out How to Land the Rocket Ship

Dana Blankenhorn

Since coming public in June 2016, Twilio (NASDAQ:TWLO) shares have been a rocket ship for investors. Shares that first traded at $24 three years ago are worth $144.11 as of the close on June 7, a gain of 500%. They’re up 860% from the initial IPO price.

TWLO Stock: Twilio Needs to Figure Out How to Land the Rocket Ship

Source: Web Summit Via Flickr

Credit goes to rapid growth for the Web-based communications company, with revenue now rising at 30% every quarter. For the March quarter the company pulled in $233 million, against $650 million for all of 2018.

Note that we haven’t mentioned profits. There still aren’t any. Losses are continuing to increase, as research and selling expenses swallow gross profits that are still more than half of revenue. Thus, the company has launched a $750 million share offering, and allowed underwriters to buy an additional $112.5 million of stock at $133.

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But the question in cases like this is always, can management land the rocket ship?

The Bull Case for TWLO Stock

The bull case starts with CEO and co-founder Jeff Lawson, who also co-founded Stubhub and was one of the original product managers at Amazon (NASDAQ:AMZN) Web services.

Lawson has been profiled as “the wizard of apps,”  because Twilio’s APIs let companies add fully automated text and voice services to their apps. Twilio software is now used by customers ranging from Coca-Cola (NYSE:KO) to Facebook (NASDAQ:FB).

Investors are betting that Lawson can beat the “bad actors,” tracking use of the platform to keep out spammers and robocallers, using machine learning to spot efforts at phishing and abuse. This, and automating protection under Europe’s General Data Privacy Regulation (GDPR), helps keep Twilio from becoming a commodity product. Bulls are also betting Lawson can keep spotting good acquisitions like Sendgrid, an e-mail platform purchased last year for $2 billion.

Bulls can also point to institutional confidence in Twilio. Institutions now own more than 50% of the common. These investors can usually distinguish between short-term success and sustainability.

The Bear Case for Twilio

The bear case starts with the fact that voice, text and e-mail are commodity services, and that this market is shrinking as data calls replace voice calls.

Speculators are already seeking options protection for their long positions, concerned that growth has to slow as the market is absorbed.

Our James Brumley is among those who insist the company’s growth can’t be sustained. He writes both start-ups and giant companies like Cisco Systems (NASDAQ:CSCO) can incorporate Twilio’s concepts in their apps, and that scale isn’t yet leading to profit.

This is what I mean about landing the rocket ship. Many companies grow quickly only to falter when it comes time to turn revenue into profit. Securing apps is becoming an increasingly vicious game. The Android operating system of Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google unit was recently infested with adware that can wreck phones, through what had been a reputable app provider.

But competing with bad guys is competing. If Twilio can continue to secure its services, real profit becomes possible.

The Bottom Line

Investors who have ridden the Twilio rocket ship to this point are right to try to lock in their profits and seek protection, if only because large numbers are harder to grow than smaller ones. With a market cap approaching $20 billion on trailing year sales of $650 million, Twilio is more than fully valued.

But I wouldn’t hit the panic button just because antitrust officials are going after the Cloud Czars upon whose success apps like Twilio depends. Get your money out, seek protection but know that a hard fall may become a buying opportunity.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.

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