Twilio: Thanks For The Gift

Twilio: Thanks For The Gift

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Twilio is the undisputed leader in the rapidly growing CPaaS market, which was a huge beneficiary of the COVID-19 pandemic.

This is not strictly a pandemic play however as strong growth is set to persist for many, many years to come given increased digitalization.

Sustained profitability is set for 2023 and beyond which should remove a key argument for bears.

Twilio is now trading at valuation levels not seen since before the pandemic, however the company is now nearly 3 times the size and even more entrenched.

For long term growth investors, Twilio, at current levels is a compelling buy.

jaanalisette/iStock Editorial via Getty Images Twilio ( TWLO ) has been very good to me over the years, mainly because it is one of the few examples I can point to of stocks that I was able to time almost perfectly on multiple occasions.

Timing is not my strong suit, I am pretty much exclusively a long term investor. Once I buy, I may tinker with a position now and then but generally hold for multiple years until my thesis changes.

With Twilio, frankly, I have been lucky two times now, once in 2018, buying at $56 and selling in mid 2019 for $143 and the second time buying in March of 2020 for $89 and selling at $380 nearly a year later.

Both of these times, the only reason that I sold was that the price had run so far ahead of itself, in my opinion, that I estimated that I could see flat or negative returns for years by holding.

I am sincerely hoping that my good luck with Twilio continues for round three and in this article I would like to lay out my thoughts for why the current $132.48 share price is a tempting bargain for this leader in the high growth CPaaS market. Overview

The CPaaS market or Communications Platform as a Service that Twilio operates in is a broad and rapidly growing market estimated to reach $47 billion by 2027. Verified Market Research What is CPaaS? Basically, it is the functionality of allowing apps to communicate with customers or the fusion of software into communication systems. This fusion of software into communications allows businesses to track, analyze, automate, plan and customize their entire communications infrastructure.

Receive an email from your bank that your ATM card was just used? That’s CPaaS. Get a call from your Grubhub ( GRUB ) delivery driver that he doesn’t have the correct entry code to your gated mansion on the hill? That’s CPaaS. Receive a text from your child’s school that it is closed for the day due to a rabid bat that is stuck in the HVAC system? You guessed it, that is also CPaaS.

CPaaS possesses nearly unlimited options to build an effective communication strategy for businesses and organizations that is frictionless, effective and capital efficient. It is still considered to be very early days in the industry, however Twilio is the undisputed 300lb gorilla in the market today. IDC Marketscape Many bear arguments of Twilio take a rather simplistic view of CPaaS and believe that all providers are created equal and that it is a commoditized market. I believe that argument is woefully shortsighted as Twilio has for many years cultivated a cult like following among developers leading to countless unique and specialized API’s that integrate seamlessly into workflows.

Customers who have implemented Twilio’s solutions have now built their entire businesses and technology stacks around this integration into Twilio’s products, leading to high customer switching costs. Twilio uses proprietary coding that is not compatible with other services and as a result, it is next to impossible for a customer to move an application built on Twilio to another vendor without significant time and expense. In other words, contrary to current sentiment, Twilio does in fact have a moat. Valuation

Twilio by its nature as a CPaaS business will likely never earn a sustained SaaS type of valuation. This is mainly due to the embedded costs of running a CPaaS business, most notably the network costs required. Twilio must pay telecom carriers for the usage of their systems when connecting a call, text etc. leading to margins that are typically lower than a pure software SaaS.

Twilio currently enjoys 54.8% gross margins and while the company has plans to grow margins above 60% long term, this represents a likely ceiling for the company given the network costs required.

The company, in addition, has forecasted long term net income margins in the 20% […]

source Twilio: Thanks For The Gift

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