An early TWLO review and request for some help

I just saw that Twilio is announcing earnings on July 31. I’ve already starting pecking away at my monthly review, so I thought I’d post TWLO early. It’s still a 12.0% position for me and I have no immediate plans to do anything before earnings. However, I’d love to get some feedback on my ramblings below…

TWLO – I continue to mentally grind a bit on TWLO. Last month I wrote:

”It’s probably fair to point out I’m having a minor mid-life crisis with TWLO at present. There’s really no arguing what they’ve done to this point. However, I see a little muddiness when trying to guesstimate their future. Their raw numbers the rest of this year will undoubtedly impress, but how much of that is due to the SEND acquisition? Comps will be much tougher starting in 1Q20, especially after adding a company that comes in with slower growth right off the bat. In addition, gross margins which already rank near the very bottom for my companies will be pressured even more by the recent Verizon price increase. Diabilito and Bear’s recent thread on expenses provides some food for thought as well (https://discussion.fool.com/twilio-sm-spending-analysis-34237109…). Finally, Twilio ranks dead last in YTD price appreciation in the non-IPO division of my current portfolio at +52.7%. I realize in a vacuum that’s a borderline ridiculous statement, but it’s a valid observation in terms of relative performance against my other holdings. Is the market trying to tell me something that I’m simply not hearing? I can’t see myself abandoning TWLO, but I am at least starting to mull over whether it deserves a lower allocation until things become clearer. “

Maybe I’m just a tough crowd, but Twilio’s July is once again lagging the majority of my holdings and has me reexamining its allocation size. In fact, since the February 1 SendGrid close Twilio’s 26.3% gain ranks dead last by a WIDE margin among the eight stocks I’ve held that entire span. Shockingly, OKTA being second worst at 61.4%(!!!) just goes to show what an incredible year this has been. Quick straw poll…who would have guessed this price appreciation since 2/1?


Apple		23.8%
Twilio		26.3%
Under Armour	28.6%	
Microsoft	34.4%	

I surely wouldn’t have predicted that. Under Armour? Really?!?

It’s not that I doubt whether Twilio will be a successful business, and I obviously wouldn’t own a 12.0% position if I didn’t see the bull case. However, I just can’t figure out why the stock isn’t seeing the same love as most of our other companies. If nothing else, it doesn’t seem to be getting the same hyper growth premium. That observation is now nagging at me for the second month in a row. Given its current revenues and market cap, I find myself wondering if the market views the SendGrid acquisition and subsequent May secondary offering as signs TWLO is creeping toward the top of its organic S-curve.

There’s no denying SendGrid massively increased TWLO’s customer base. However, the acquired tech and email functions are surely more tuck in than game changer. Likewise the narrowband IoT announcement was interesting and is a likely harbinger of the future, but how much does that expand their foreseeable TAM as the company continues to get larger? And finally, after adding an arguably second-rate executive from stodgy old GE to its board, was FlyingCircus right all along in pondering whether Twilio has jumped the shark (https://discussion.fool.com/given-immelt39s-entire-career-experi… )? Regardless, I’ll be paying very close attention to July 31 earnings, particularly any comments about gross margins, the SendGrid integration or any potential TAM expansion.

I really do hope this rant ends up being much ado about nothing, but I am definitely on alert. And it’s fair to point out that the last time I expressed doubts like this was my February recap on Alteryx (https://discussion.fool.com/stocknovice39s-february-portfolio-re…), which now happens to be my biggest position. Go figure.

In the meantime, I have a second quick straw poll…am I being a thoughtful contrarian or just impatiently paranoid?

To kick things off I already know what ethan1234 and GauchoChris think from earlier today:

Ethan -

TWLO
High: Provides the building blocks for developers to easily and powerfuly allow communication of all forms. Has reached a scale that it no longer has much in the way of competition

Low: needs to effectively integrate and cross sell sendgrid (not exactly a low but a risk), margins aren’t great as TWLO is a middle man between telephony and developers (i’m reaching here)

Chris -

TWLO: TWLO has shown continued excellent business metrics almost across the board. The only negative is the lower gross margins compared to those of my other stocks. I expect TWLO to be a much, much larger company eventually so long term I see it having similar potential to MDB. A big part of the potential is due to TWLO’s disruptive power in multiple huge markets. This long term vision for the company gives me greater confidence to speculate/trade on TWLO in the short term when I see opportunities. This is because if I am wrong on the short term timing then I can still avoid losses assuming the stock eventually goes up (short puts can be rolled forward indefinitely). So for TWLO I see some catalysts that led me to speculate on a short term trade (about a month). The earnings are likely due out on 7/31 or 8/1 although the date has not been announced yet. The SendGrid integration is well underway so there’s a chance for some cross-selling synergies. Also, TWLO just announced some improvements to SendGrid’s marketing emailing capabilities (see press release from last week). Then there’s their annual Signal conference on August 6-7. TWLO and the other SaaS companies tend to announce new products at their annual user conferences so there’s likely going to be some interesting new stuff. All of this can move the stock and lead to analyst PT upgrades. So I sold the Aug 2 $160 puts to buy calls ($142 and $150 strike prices) that expire on 8/23. The 8/2 expiration date of the short puts was chosen to maximize premium plus give a chance for worthless expiration immediately after the expected earnings release (assuming it’s on 7/31 or 8/1). If the stock doesn’t rise to $160 after earnings then they can be rolled forward on a weekly basis. The 8/23 expiration date was chosen to give analysts time to digest any new products from Signal, update their financial models, and issue PT increases…then time for the stock to respond to this. TWLO is a 19.2% position for me and I’m happy with this allocation.

Thanks in advance to any others who want to chime in.

36 Likes

Comps will be much tougher starting in 1Q20, especially after adding a company that comes in with slower growth right off the bat. In addition, gross margins which already rank near the very bottom for my companies will be pressured even more by the recent Verizon price increase.

The above i agree with. plus the secondary offering/dilution has led to a larger mkt cap quickly

However, i think twlo deserves a short leash but still has some life in it.

Revenues should hit $1.2b this year. If you think they still deserve a 20 p/s near the point when they report q4 and full year results, then that would be a 24b mkt cap, giving you another 25%+ from today’s levels.

Flex is their way of continuing growth and along with SEND should lead to maybe a bump up in GM at least.

I see a lot of concerns you have but bc they have good compares the next couple Qs i think stock should be ok for a while longer.

Dreamer

13 Likes

I reduced my TWLO position earlier today before your post. I trimmed 3% to bring it from 15 to 12. I added 1.5 to PLAN and 1.5 to MDB.

Just like you, my large position in TWLO has been nagging at me. TWLO has beat the past two earnings! But the market has yawned about it, and the stock even dropped a little both times bc of weak guidance. If the market doesn’t give you props w/ a beat and your stock just flows w the market, you are no longer in a hyper growth name.

I plan to watch this earnings closely and reduce my position by about half if there is no reaction to a beat this time. TWLO has its large market cap working against it, and it is going to be tough (expensive) to keep trying to disrupt new markets.

I currently plan to add to ROKU if if I have to reduce. I’ve owned my newest tv for five years now. That tells me all these tv sales w built in Rokus (1/3 of the market and rising) are at least going to be around the next couple of years. I like to think of it as a net retention rate for advertising.

Best,
BTL

2 Likes

However, I just can’t figure out why the stock isn’t seeing the same love as most of our other companies. If nothing else, it doesn’t seem to be getting the same hyper growth premium. That observation is now nagging at me for the second month in a row. Given its current revenues and market cap, I find myself wondering if the market views the SendGrid acquisition and subsequent May secondary offering as signs TWLO is creeping toward the top of its organic S-curve.

I’m not as good as Saul and others here at reading the market, but perhaps the market may be in a holding pattern with Twilio?

One potential reason for the hold out could be the huge OpEx I pointed out in that post with Niki. Q1 was a startling quarter. Revenue grew a great deal less than we expected (https://discussion.fool.com/poll-friday-fun-twilio-next-q-341357…) and expenses grew faster than ever. Q1’s huge OpEx could portend rapid growth potential. But it also adds an element of uncertainty, which the market hates. Will those expenses bear fruit? Is Twilio making bets that aren’t prudent, to try to continue rapid growth? The market may have all kinds of questions.

Add to all that the uncertainty of how the acquisition will pan out (but on the other hand the big potential there), the ballooning share count (which may prove to have been a one time thing)…there’s just a lot to digest.

If I’m right, the market is doing just that: digesting – taking a “wait and see” approach to the coming quarter. Could be volatile – lots of upside, but also downside possible. If growth accelerates…maybe Twilio’s 2019 performance catches up to some of our others. If not, if OpEx remains elevated and we don’t see the fruits on the revenue side…Twilio may continue holding or worse.

I’m optimistic that they know what they’re doing. That’s just me betting on their track record. But as I said, I’m watching extremely closely.

Bear

30 Likes

while I agree with all of these concerned on TWLO, one potential upside to bring to attention is this.

TWLO has massive leverage to major corporate, consumer, political, social events… as text messaging is becoming mainstream communication method for large organizations to reach to their target audience (customers, voters… you name it)

I believe it was the December quarter when TWLO announced large surprise beat that was helped by heavy one-time spend by two different customers, one of them was related to political (was there an election somewhere) and another one was in Europe…

the point is - text based B2C communication is just becoming norm in our lives, there are too many use cases and events that can leverage this and it will be hard to guess what event / use case will deliver that extra edge in which quarter…

my thought is that it is still a few quarters, possibly a couple of years before we will see TWLO anywhere near matures in terms of its potential revenue size just on current use cases and revenue bases (i am not even thinking of flex or IoT here)… sure, one or two quarters up and down will happen but it will be hard to guess / time this as there is more chance of upside surprises than downside surprises.

nilvest
TWLO is my 4th position at 12%

21 Likes

Another factor that could play into the price in the near term is the lockup period for their second offering ends on 7/30.

Add to all that the uncertainty of how the acquisition will pan out (but on the other hand the big potential there), the ballooning share count (which may prove to have been a one time thing)…there’s just a lot to digest.

If I’m right, the market is doing just that: digesting – taking a “wait and see” approach to the coming quarter. Could be volatile – lots of upside, but also downside possible. If growth accelerates…maybe Twilio’s 2019 performance catches up to some of our others. If not, if OpEx remains elevated and we don’t see the fruits on the revenue side…Twilio may continue holding or worse.

My primary concerns right now is that between the SendGrid acquisition and the stock offering, they have diluted the stock 50% in the last year. Also, I don’t expect them to organically grow anywhere near the 81% they put up last quarter. Both of those points are cause for some (in)digestion for me. It may prove brilliant to issue so many shares while the price is high, but it clearly adds uncertainty to the near-term as well as implying that management doesn’t find the price undervalued.

I trimmed my position back in May https://discussion.fool.com/twlo-math-not-adding-up-34196616.asp… it is seventh behind AYX, FB, SHOP, ZS, MDB and TTD. I am holding with hope and agree there is a possibility of a nice beat in the upcoming Q, but barring new hope, I’ll be looking for a better idea for my money before year end.

5 Likes

My primary concerns right now is that between the SendGrid acquisition and the stock offering, they have diluted the stock 50% in the last year.

If Company A has 100 shares and Company B also as 100 shares, when you join them they have 200 shares but no dilution occurs [all else being equal]. Each share is a smaller slice of a larger company.

Denny Schlesinger

10 Likes

Hi Denny,

Are you forgetting this? https://seekingalpha.com/pr/17528081-twilio-announces-launch…

Are you forgetting this? https://seekingalpha.com/pr/17528081-twilio-announces-launch…

No. I was responding to this statement: “My primary concerns right now is that between the SendGrid acquisition and the stock offering, they have diluted the stock 50% in the last year.”

The quoted text implies a double dilution, once for an acquisition and another for the secondary offering. Both events add value to the company, the first in the form of a business and the second in the form of cash. In my post I was addressing the first event. If the cash from the secondary goes to buy out the shareholders of SendGrid then it’s not a second dilution. In addition, if the cash from the secondary improves the business then the “dilution” is welcome.

Of course one would prefer a company with a positive cash flow but one has to judge the secondary in context, dilution is not automatically bad.

Denny Schlesinger

12 Likes