Personal Finance

Better Buy: Twilio Inc vs. Vonage Holdings

A man using a smartphone.

Twilio (NYSE: TWLO) is a divisive stock. The bulls believe that demand for its cloud messaging services will rise as developers outsource more communication features, while the bears believe that the company's high valuation, lack of profits, and dependence on big customers could sink the stock.

The bears also note that a competing company called Vonage Holdings (NYSE: VG) , which purchased a Twilio-like service called Nexmo last year, could loosen Twilio's grip on the cloud-based messaging space. Let's take a closer look at both companies to see if either stock is worth buying at current prices.

A man using a smartphone.

Source: Getty Images.

What do Twilio and Vonage do?

Twilio's cloud platform processes messages, calls, videos, and other services for apps. The platform delivers messages in Airbnb and Facebook 's (NASDAQ: FB) WhatsApp, lets Uber passengers contact their drivers, and helps Coca-Cola Enterprises track its technicians.

In the past, software developers created those features from scratch, which was often buggy, expensive, and time consuming. That's why leaner "no-stack" apps became popular, with developers creating a core feature while outsourcing other features (like maps, payments, and messages) to individual service providers like Twilio. Twilio provides developers with an API, which is integrated into the app's code, and charges them every time its platform is accessed.

Vonage is a more diversified cloud communication services provider. It provides cloud-based unified communications solutions, which merge voice, text, video, data, collaboration, and other features on a single platform. It also provides cloud-based middleware, which integrates its communications platform with popular CRM (customer relationship management) platforms.

Vonage's acquisition of Nexmo added over 350 enterprise customers, including Uber, to its client list. Uber rival Lyft, another Twilio customer, added Nexmo as an alternative cloud services platform earlier this year -- indicating that Twilio might lose market share in the cloud messaging market.

How fast are Twilio and Vonage growing?

Twilio's revenue rose 66% to $277.3 million in 2016, and analysts anticipate 35% growth this year. Back in May, Twilio admitted that its top customer Uber, which generated about 12% of its revenues during the first quarter, planned to pivot away from Twilio's services toward an internally developed platform.

A woman waits for an Uber.

Source: Uber.

Uber's weight on Twilio's top line dropped to 11% for the first six months of 2017, compared to 14% in 2016. However, that decline was easily offset by fresh customer growth.

During the second quarter, Twilio's active customer accounts soared 41% annually to 43,431, and its dollar-based net expansion rate -- which measures the amount of revenue it generates per customer -- surged 131%. Those gains enabled its base revenue (which excludes customers like WhatsApp that didn't enter minimum revenue contracts) to rise 55% -- which is impressive, since Uber is a "base" customer.

Vonage's revenue rose 72% to $376 million in 2016, but Wall Street expects just 4% growth this year. That's because most of Vonage's growth last year was driven by its acquisition of Nexmo, which it subsequently renamed "Vonage API".

Last quarter, Vonage's total revenues rose 8% to $252 million. Its core Vonage Business unit generated organic sales growth of 23%, its cloud-based unified communications platform revenues rose 44% on the same basis, and the Vonage API unit generated $35 million in revenues on its own. However, those enterprise-facing gains were offset by a 13% drop in consumer revenues.

Profitability and valuations

Twilio isn't profitable by GAAP or non-GAAP metrics, and analysts don't expect that situation to improve anytime soon. However, its non-GAAP losses have slightly narrowed in recent quarters.

Vonage is profitable by both metrics -- its GAAP net income of $5 million last quarter seems slim, but it marked a huge jump from $218,000 in the prior year quarter. On an adjusted non-GAAP basis, its net income soared 50% to $15 million. Analysts expect Vonage's non-GAAP earnings to rise 42% this year (on the tailwinds of Nexmo) and another 4% next year.

Twilio trades at 7.4 times sales, which is slightly higher than the industry average of 6.9 for application software providers. Vonage trades at 102 times earnings, which is much higher than the industry average of 22 for telecom service providers. Its P/S ratio of 2 is also higher than the industry average of 1.5. Simply put, neither stock looks cheap at current prices.

The winner: Twilio (for now)

I personally wouldn't buy either stock right now. Twilio still has a lot to prove, while Vonage's high valuation and weaker position in the cloud communications market don't inspire much confidence.

But if I had to pick one of these stocks I would stick with Twilio, since it's an established market leader with strong ties to Amazon , Facebook, and other tech giants. Vonage is certainly a threat to Twilio, but Twilio's expansion of its ecosystem with additional unified communications services could also make it a threat to Vonage.

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Leo Sun owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN and Facebook. The Motley Fool recommends Twilio. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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