Should You Buy Twilio Inc (TWLO) Stock? 3 Pros, 3 Cons

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Twilio Inc (NYSE: TWLO ) stock went public this year at $15 on the New York Stock Exchange on June 23, and surged 92% on the first day of trading, closing at $28.79 a share. Twilio stock went as high as $70 in late September before gravity set in and brought it down to $29 a share.

Twilio Inc (TWLO) Stock Has 375% Upside for the Bulls

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You may not have heard of Twilio before. Twilio enables software developers to program voice and text messaging.

When you install WhatsApp or Facebook Inc (NASDAQ: FB ) Messenger on your phone, you will get a text with an authorization code, and this is powered by Twilio. This promises great value for businesses, helping them stay in contact with customers in the digital age.

Twilio Stock Pros

Rapid Growth: Those who buy TWLO stock will buy into a fast-growing business. Twilio is growing customer accounts and revenues at a fast pace. As of Sept. 30, 2015, Twilio had 23,822 accounts . A year later, TWLO's accounts grew to 34,457, a 44.6% increase. Twilio grew revenue even faster, at a 75% rate, which suggests that it's growing its revenue per user. Growth should remain steady as the company branches out into enterprise services.

High-Gross Margin: Twilio is not profitable as of yet, but it should be in the future. Twilio's enjoys a high gross margin at 55.6%, which indicates a durable competitive advantage . Also, while Twilio has not yet managed a profit, the operating cash flow is positive, with $4.4 million net cash from operations.

This indicates that the underlying business is sound. Twilio is establishing itself as a premium brand with cloud communications, with a simple and easy to use platform giving customers global reach. Twilio's support matters for apps such as Uber, freeing them up to concentrate on core services. TWLO adds value to customers, and this could translate into higher margins in the future.

Spread of Cloud Communications: Twilio should benefit from some tailwinds as cloud-based communication becomes adopted. Apps like Uber need to text their users for things such as authentication or notifying them that their car is ready. The development of apps will increase the need for services provided by a company like Twilio.

Twilio will also benefit as businesses keep in contact with their customers via their smartphones. Retailers will want to use text messages to alert their customers to special sales or promotions. Instead of calling helplines and dealing with annoying phone trees, millennials prefer to interact with businesses via text .

Twilio Stock Cons

Competition-Real and Potential: Twilio faces a long list of competitors , including Cisco Systems, Inc. (NASDAQ: CSCO ) Tropo , Sinch, Plivo, CallFire, Vonage Holdings Corp. (NYSE: VG ) Nexmo, thinQ and Twilio's competitors, such as Plivo, Sinch, and Nexmo, generally charge less for their services.

Also, telecom companies could compete with TWLO by offering their own cloud API services. AT&T Inc. (NYSE: T ) has offered developers an API platform since 2012. Telecom companies will face cost and pricing pressures in the years to come, and might move toward this. These network providers, currently are suppliers to Twilio, providing phone numbers and sending text messages and calls. Things might get difficult if they decided to compete with Twilio.

Tech giants with deep pockets and huge platforms such as, Inc. (NASDAQ: AMZN ) and Facebook might decide to compete with Twilio as well. Facebook Messenger appears to be moving toward business communications , which could threaten TWLO. Amazon began offering push notifications in 2013, a move toward communications.

Valuation: Twilio stock's high valuation bakes in a great deal of growth, and buying TWLO now carries a lot of downside risk. Currently, Twilio stock trades at 11 times sales and 9 times book value while operating at a loss. This means that the market has high expectations for TWLO stock. If Mr. Market is disappointed, those who buy TWLO stock will suffer.

Buying Twilio stock at such expensive prices is a risky proposition. A s richly valued as Twilio stock may be, however, it was trading at an even higher multiple of sales in October. Twilio stock reached its 52-week high at $70.96 on Sept. 28. That represented a multiple of nearly 25 times sales, a stratospheric valuation.

Lock-Up Period Expiring: When Twilio listed in June, insiders and major shareholders agreed to a lock-up period during which they would not sell their shares. This lock-up period will expire on Dec. 20 , and you can expect some holders to sell TWLO stock, driving down the price. A Bloomberg article summarized this in June:

"For Twilio's biggest shareholder, Bessemer Venture Partners, the wait is almost over. It is positioned for a major pay day once the lockup period expires in December, allowing it to sell some or all of its stake. The firm owns 25% of the company."

When Twilio stock announced a secondary stock offering in October, shares plunged 14% , so holders of TWLO stock should expect a dip next week.

The Takeaway

Twilio does seem to be a promising company with a bright future. Buying TWLO stock at this stage seems very risky, however, and might not be suited to all investors.

The possible return is high, but so is the risk. Most investors should probably resist the temptation to buy in at such an early stage.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

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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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