Is Twilio Stock Overvalued?

Is Twilio Stock Overvalued? Lyft (LYFT). Airbnb (ABNB). Shopify (SHOP). Instacart. DoorDash. Netflix (NFLX). eBay (EBAY). Morgan Stanley (MS). The American Red Cross. All of these organizations have something in common.

They rely on seamless communication to ensure an exceptional customer experience, and they trust Twilio to make that communication possible.

These nine are just the beginning – Twilio has more than 208,000 clients using its technology to connect with their customers. 

Twilio is a technology company that specializes in cloud-based communications tools. Essentially, Twilio offers customizable communications software that integrates with just about any platform or application.

Before Twilio, companies like Lyft and DoorDash had to develop their own text and phone tools. These are tough to get right, and connections were often spotty and unreliable. 

Now, the developers responsible for putting these platforms together can simply drop Twilio code into their software. This is formally referred to as an application programming interface or API.

The APIs connect with Twilio’s proven cloud-based communications infrastructure, which is particularly effective in that it can scale to meet demand as client businesses grow and expand. 

Twilio stock was up 220 percent in 2020. That has investors questioning whether to buy in now. Will the company continue its rapid growth into 2021, or is Twilio stock overvalued?

Why Twilio Stock Went Up

The gig economy has millions of freelance workers coming together to provide services like ride-sharing and food delivery. These individuals contribute their own vehicles and mobile devices to get the job done, but they rely on larger companies to provide infrastructure to connect them with customers. 

Outside of the gig economy, other businesses are adjusting to meet the changing expectations of a digital world. Consumers are connecting with their favorite brands in new ways – text, video, instant message, and social media to start – and even the most established organizations are struggling to transition from call centers to alternative communication methods. 

The companies facilitating connections between gig workers and consumers or consumers and their brands need robust tools that can handle increasing volume. Furthermore, these tools have to be customizable to meet the unique communication needs of contractors and clients.

Twilio has simplified and streamlined cloud-based communications tools better than anyone else, making it the go-to solution for some of the world’s biggest companies.

While this type of communication was already trending up at the start of 2020, the pandemic created a sharp spike in demand. Pre-COVID, consumers were moving to these types of digital services gradually.

Once social distancing became the norm and people were confined to their homes, use of digital platforms skyrocketed. Companies like Netflix (NFLX), DoorDash, and Shopify (SHOP) grew in value, and they took Twilio along for the ride. Twilio, along with its tech-centric peers, were the biggest beneficiaries of the pandemic.

Twilio Financials Skyrocket Above $1 Billion

Twilio has been around since March of 2008, but revenues truly exploded in recent years. In 2017, the company reported a 44 percent year-over-year increase in revenue, followed by 63 percent in 2018, then 75 percent in 2019. 

By the end of third quarter 2020, Twilio’s revenues were already up 51 percent, totaling $1.21 billion. Active clients increased by 21 percent year-over-year to the current total of approximately 208,000.

While the company’s management hasn’t made any predictions for 2021, they have said they expect 2020’s total revenue increase to come in at roughly 47 percent. 

Analysts have indicated that Twilio’s revenues could rise as much as 32 percent over the next 12 months. If so, it would seem that Twilio stock is a smart buy – but is Twilio’s valuation too high?

Is Twilio Valuation Too High?

Twilio’s dramatic growth in recent years has investors excited, but industry experts’ enthusiasm for the stock is more muted.

Revenue increases and long customer lists are certainly promising, but Twilio has yet to turn a profit from a GAAP perspective. 

That’s not the worst part. Twilio’s net losses are getting bigger year-over-year, which indicates there could be a problem. Keep in mind that many tech companies show losses for an extended period, but the gap tends to narrow from one year to the next. 

For the nine-month period ending September 2020, Twilio’s net losses increased from $217 million to $312 million year-over-year. Given that trend, some analysts are suggesting that current investors take their profits now, and new investors hold off on adding Twilio to their portfolios.

Will Twilio Stock Drop?

Aside from the issue with ongoing losses, investors have an additional concern.

The number of outstanding Twilio shares is going up at a rapid rate. This is due in large part to Twilio’s stock-based compensation strategy, which has resulted in a 70 percent increase in the number of outstanding shares if the last three years are considered.  

Furthermore, year-to-date in 2020, there was 21 percent rise in stock-based compensation expenses year-over-year.

The most recent total was $238 million. Note that without stock-based compensation expenses, Twilio would have shown a small profit starting in 2018. 

Finally, Twilio is not the only game in town these days. MessageBird is quickly becoming a troublesome competitor. Most recently MessageBird lured Uber away from Twilio – a significant victory. 

Between the increasing losses, growing competition, and dilution of shares, a drop in stock prices appears more than possible, perhaps even likely.

Is Twilio Stock Overvalued? The Bottom Line

Twilio’s products are in high demand, and that’s always good news. However, increased revenue doesn’t benefit shareholders unless expenses are managed properly.

It is common for tech companies to operate at a loss during the early years, but the expectation is that business leaders work towards profitability as quickly as possible.

Given the challenges Twilio faces, many analysts agree that Twilio stock is overvalued. Other fast-growing tech companies look more promising in terms of return on shareholder investment – for example, Salesforce (CRM), Qualcomm (QCOM), and Cloudflare (NET).

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.