Twilio(NYSE: TWLO) likely minted a lot of millionaires in its first five years as a publicly traded company. The cloud-based communications software provider went public at $15 in June 2016, and it reached its all-time high of $443.49 in February 2021.
So if you had invested $40,000 in its initial public offering, that would have briefly blossomed to $1.18 million. But today, Twilio's stock trades at $59, and that investment would only be worth about $157,000. A nearly four-bagger gain in less than eight years is still impressive, but Twilio burned a lot of its investors who hopped aboard at the wrong time.
Image source: Getty Images.
But could Twilio still generate millionaire-maker gains for investors who buy the stock today? Let's review its business model, growth rates, and longer-term challenges to find out.
What does Twilio do?
Twilio's cloud-based platform processes text messages, calls, videos, and other features for mobile apps. Instead of building those features from scratch, developers can simply outsource them to Twilio's platform with a few lines of code.
That approach saves developers a lot of time and money, and it's easier to scale up as an app gains more users. Twilio also doesn't lock its customers into restrictive subscriptions -- it charges only usage-based fees whenever its services are accessed. Big companies like Airbnb, Uber, and DoorDash all weave Twilio's services into their own mobile apps.
The bulls initially adored Twilio because its business model was simple, it enjoyed a first-mover advantage, and its growth rates were explosive. From 2015 to 2021, its revenue had a compound annual growth rate (CAGR) of 60%. That was driven by a combination of its organic growth and its acquisitions of smaller companies.
Why did Twilio's stock drop nearly 90% from its all-time high?
By the time its stock peaked in early 2021, its enterprise value hit $70 billion -- or 25 times the revenue it would generate in 2021. Unfortunately, that frothy valuation set it up for a steep drop as its growth cooled off over the following two years.
During an investor day presentation in late 2020, Twilio declared it could grow its revenue organically by at least 30% every year through 2024. But this is how Twilio actually fared on an organic and reported basis over the past three years.
Metric
2021
2022
2023
Organic revenue growth
42%
30%
10%
Reported revenue growth
61%
35%
9%
Data source: Twilio.
Twilio mainly blamed the macro headwinds for that slowdown, because it forced companies to rein in their cloud spending. However, it's also saturating its core market, and it faces tough competition from similar cloud-based communication platforms like MessageBird, Bandwidth(NASDAQ: BAND), and Ericsson's (NASDAQ: ERIC) Vonage.
From 2023 to 2026, analysts expect Twilio's revenue to have a CAGR of less than 8%. That dim outlook suggests that its high-growth days are over -- and that's troubling because it's still nowhere close to breaking even on the basis of generally accepted accounting principles (GAAP). Many telcos are also squeezing its gross margins with higher carrier fees, which are levied whenever a third-party app accesses their networks.
As Twilio's growth slowed down, it laid off thousands of employees, reined in its spending, and paused its aggressive acquisitions. But it also green-lighted a $1 billion buyback plan last February, repurchased $730 million in shares in 2023, and just authorized another $2 billion buyback plan for 2024. That's an odd strategy for a company that racked up a GAAP net loss of $365 million in 2023.
All of those problems crushed Twilio's stock. Activist investors besieged the company and demanded changes over the past year, and its founder and CEO Jeff Lawson stepped down this January.
Lawson's successor, Khozema Shipchandler, is reportedly mulling a sale of Segment, the customer data company it acquired for $3.2 billion in 2020. But scaling back its business might be a disappointing move when many of its investors want fresh growth.
Can Twilio mint more millionaires in a decade?
With an enterprise value of $7.8 billion, Twilio trades at just 1.8 times this year's sales. That price-to-sales ratio might seem cheap, but Twilio could struggle to command a higher valuation if it continues to generate single-digit revenue growth.
If Twilio matches Wall Street's expectations through 2026, grows its revenue at a CAGR of 8% through 2034, and still trades at about two times sales, its enterprise value could reach $19 billion by the final year. That would be more than double its current value, but it certainly wouldn't make you a millionaire unless you invested $500,000 in the company today.
Twilio's prospects might brighten if it can right-size its business and find new ways to grow again, but its wasteful buybacks and unclear plans for the future suggest it will underperform many of its cloud-based peers over the next decade.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb, DoorDash, Twilio, and Uber Technologies. The Motley Fool recommends Bandwidth. The Motley Fool has a disclosure policy.
