When we assess a company’s stock as a potential investment, we extensively analyze it using all of the facts and data at our disposal. We then compare this information regarding a certain company to four major values: circle of competence, moat, management, and price. Based on this, we determine if the stock is a solid investment from the standpoint of value investing.
Today, we will be looking into the company, Twilio, and discussing whether its stocks are a worthwhile investment. The company itself is not that commonly heard of, and is definitely not a staple household name. Nevertheless, it is an organization we end up interacting with regardless of whether we want to or not. Those who are familiar with Jeff Lawson and his prolific career as a CEO of many startups might be familiar with the company name, but needless to say, it is a very small niche.
Essentially, Twilio offers communication tools that allow your favorite apps such as Airbnb, Instacar, Doordash, Netflix, and similar app-based products to connect with their user base. Whether this is an automated text message when your order is right around the corner, or a Whatsapp chat with a consultant of a company before you make a purchase, it is all too often powered by Twilio. Their sole purpose is to make communication channels easy and intuitive for developers who create products at scale.
Circle of Competence
While I may not be a developer or an app creator myself, I frequently engage with products that use Twilio on a very regular basis. As someone who is personally a huge proponent of convenience, their use cases are very valuable. Whether it is about security verification codes sent to my phone or status updates on my order delivery, the convenience of using Twilio-powered services cannot be understated. This familiarity puts it within my circle of competence.
It is also worth noting that the global pandemic outbreak has significantly boosted the kind of online-based apps that utilize Twilio-powered communication channels. Twilio, as an organization, works with over a quarter million companies around the world. For a new startup, 250,000 is an unprecedented number.
Furthermore, the company is also rapidly expanding its customer base and development teams by approximately 20% every single year. In the future, there will be a substantial demand for such automated communication channels at scale as the world gets more and more integrated with technology and the needs of the everyday consumer for convenient products and services keep going up.
Twilio is a company with a rather protected moat. There are not a lot of competitors in this space yet, although that would definitely help when it comes to driving home innovation. Twilio is making full use of this feature, ensuring that resources are spent in the optimization and expansion of the services.
Twilio isn’t going out of business anytime soon because while they have a single core product, their services are easily expandable to many different types of segments and niches, hence, their large and growing customer base.
One of the many reasons why we picked Twilio for a discussion on stock dissection is because, at the time of writing, its price has experienced some temporary setbacks. There is an ongoing Wall Street debate over its worth as a business entity, leading to further fluctuations in the share prices of the company.
Unlike value stocks that have been out for more than a decade with enough data to make large-scale references, I think Twilio is a high-growth company and should be treated as such. It is worth noting that as growth stocks are fairly riskier, one should have less space for them in the larger investment portfolio of companies (25% seems to be a good ballpark in this regard).
Growth companies, in general, do have large amounts of debt, and instead of reaching the 15% value-stock threshold for ROE and ROIC values, these numbers are often in the negative. This, however, is to be expected. What we should be more concerned with is their growth statistics. If we look at their sales growth rate, it has increased by 65% which is remarkable for a business so new. Their EPS growth rate has also increased by 50%, which is still excellent.
However, Twilio has been in the news lately due to the recent events of plummeting stock prices. Their share price in the last quarter took a big hit and was 32% below its all-time high value. This is rather confusing as their revenues still went up by 65%, albeit just not at the same rate. Adding fuel to the fire, the COO ended up stepping down, which definitely shook up Wall Street and led to further anxiety that trickled down into the share prices.
I think it is still a solid company, whose use case is not dying out anytime soon. It is just that their growth rate has plateaued a bit, which is understandable as we tend to put companies on pedestals. I still anticipate that the company will rebound soon and continue to grow. Currently, as it stands, the all-time high price has been 457 and the all-time low has been 270, putting the current opening values closer to the all-time low.
Is this an opportunity to buy cheap when you can? It all completely depends on whether you align with the company’s products, see their growth potential, and trust their managerial capacity.
As we mentioned earlier, Jeff Lawson is a rather celebrated name when it comes to successful CEOs, entrepreneurs, and for garnering angel investment for growing companies, challenger brands, and startups until they go public.
Buying into a company is essentially placing a bet on its CEO and also the management team. I noticed that the Board of Directors was rather inclusive, with up to five women in the Management Team (approximately 35%), and 3 women in the BOD. This is perhaps due to the inclusion of a Chief Division Inclusion officer within the company. The team is also rather diverse, as the Board of Directors has a VC partner, a lawyer, the Governor of Massachusetts, a previous manager from Amazon, and more.
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