At the beginning of 2021, I had picked Twilio (TWLO) as one of the companies to invest for the next 3 years. TWLO started this year around $341 quickly reached a high of $425 in March and then stayed range bound and fell about 20% last week after reporting Q3 2021 results. Basically, TWLO is down about 12% for the year when the S&P 500 is up 23%, so compared to the market TWLO is down about 35%. Were the Q3 results so bad that a 20% haircut was deserved? Let’s look into it.

First, let’s take a look at what Twilio does. Twilio is a cloud-based provider for communication tools. So everytime you are trying to login into your bank account and you receive a text, probably Twilio is behind that. That is just one of the applications supported by Twilio. You can see the entire product suite at this link. In short, it supports any type of communication between companies and their customers and developers can build applications using Twilio for their customers. Look at Twilio’s list of customers that are using their communication tools and you will see a virtual who’s who of global companies.

Now, let’s turn to financial results for Twilio. These are a few of the things that I track for TWLO with the most recent quarter in bold

Revenues

 

Year Q1  Q2 Q3 Q4
2020 $365m (57%) $401m (46%) $448m (52%) $548m (65%)
2021 $590m (62%) $669m (67%) $740m (65%)

 

DBNRR (Dollar-Based Net Retention Rate)

A 143% means that a customer that spent $1 last year has spent $1.43 this year. Higher numbers are better.

 

Year Q1  Q2 Q3 Q4
2020 143% 132% 137% 139%
2021 133% 135% 131%

 

Total Customer Accounts

 

Year Q1  Q2 Q3 Q4
2020 190,000 (23%) 200,000 (24%) 208,000 (21%) 221,000 (24%
2021 235,000 (24%) 240,000 (20%) 250,000 (20%)

 

If you look at their revenues, they are growing at a nice clip. Sometime in 2022, they will be at a revenue run rate of $1B per quarter while growing that by above 40% rates. Their Net Retention Rate has stayed above 130% although that has declined from the 143% that they were doing in 2020. This decline was expected because the number of their customers has increased. They are adding about 8-10K customers every quarter. 

If you look at Q3 2021 numbers, everything looks good, right? The revenues grew by 65%! But, why did the stock sold off about 20% the day after TWLO released their Q3 earnings? I am not so sure but my guess is that it was due to two reasons. First, Twilio is an acquisitive company. In the last year, they have made several acquisitions with Segment being one of the biggest. So the revenue growth can be misleading since they are combining the revenue growth of those companies  that are being acquired as well. However, Twilio reported that their organic revenue growth was 38% this quarter and that is nothing to sneeze about. Remember that next year these companies will report together and they expect several synergies from these acquisitions. So I am not too worried about these acquisitions. In the short-term these acquisitions can make the results look lumpy but Twilio management has proven to be excellent capital allocators in the past.

Second possible reason for the stock price decline is the departure of their Chief Operating Officer George Hu. George had been with the company for about 5 years and helped the company grow their revenues by 10 times from 300m to about 3B today. High-ranking turnovers are never easy and I think this is what has spooked the market this Halloween. However, the earning call notes that this was a planned move. Twilio founder and CEO Jeff Lawson mentioned on the call that George had a detailed conversation with Jeff about this departure and it seems like that George is leaving Twilio to grow into a CEO role at a different company. We will find out in the next quarter or so. This is not a senior management executive jumping ship because of something bad.

I believe that this is a solid buying opportunity and buyers at this level can expect a doubling by Halloween 2026 (that’s 15% annual rate of return). Therefore, I would start buying now in stages and add to my position slowly. 

Hope this is helpful.