What a time it’s been for Twilio. In the past six months alone, the company’s stock price has increased by a massive 62.7%, reaching $211.00 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Twilio, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Twilio Not Exciting?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in Twilio. Here are three reasons why TWLO doesn’t excite us, plus one stock we’d rather own.
1. Customer Retention Numbers Lag Behind Peers
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
Twilio’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 114% in Q1. This means Twilio would’ve grown its revenue by 14% even if it didn’t win any new customers over the last 12 months.
Significantly up from the last quarter, Twilio has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Twilio, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Twilio’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 48.7% gross margin over the last year. Said differently, Twilio had to pay a chunky $51.26 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Twilio has seen gross margins decline by 1.3 percentage points over the last 2 years, which is poor compared to software peers.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Twilio’s operating margin rose by 4.3 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 4.6%.
Final Judgment
Twilio’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 6× forward price-to-sales (or $211.00 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Twilio
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