Two years ago or so I was hanging with some traders around the New York Stock Exchange building in NYC. I was speaking to one trader who had been watching many SaaS & tech stocks breakout, climb higher, and higher, and while he appreciated the business models and articles he read, the move seemed to remind him of the Dotcom Bubble.
One company he spoke about was Twilio. He was not even sure what they did as a business. Most people I don't think even understand what companies like Twilio do. But he, he was insistent on it either being a short at some point or a stock to stay far away. The technicals did make sense. The euphoria for a company called "Twilio" just sounded like something in the Dotcom Bubble.
While I appreciate the sentiment, I did remember thinking: "Twilio does some $700+ million in revenue every 3 months" and also "The very text messages this trader receives whenever he logs into an app for two-factor auth is probably delivered by Twilio"
I did not buy any Twilio at the time, so I missed the run up, I also did not short any, so I missed the recent downmove. However, the conversation has stuck with me for a number of reasons. Let me explain:
1. Not everything is like the past. Yes, the age old "history doesn't repeat but it does rhyme" saying comes to mind. As does "this time is different" but the simple fact is that tech companies in the Dotcom bubble of 2000 were make $0 in revenue. Literally zero. Or maybe a few hundred thousand and trading at 1000x PS ratios or even no ratio at all because there was no revenue to begin with. No matter what someone says about Twilio, the company now generates nearly $1 billion in revenue every three months.
2. Reflecting on Twilio's recent crash, and this conversation that I have been thinking about, I must say that now seems like an interesting point in time whereby the old school traders, the ones who have been there and done that, seen the hype cycles, just may have outdone themselves with their level of pessimism. And so, while I don't have a position in Twilio, it is at the very top of my watchlist for a very fast rally.
3. Twilio's EV to revenue ratio, looking backward at the last 12 months, is 3.5. If you look forward to the next 12 months it is more like 2. And if you look forward 24 months, it is closer to one. Of course, that does imply a lot of growth, but you can look at Twilio's quarterly results to see the growth in this entire industry. I would also add that Twilio has 3x as much cash as debt on the balance sheet. $3 billion in cash to $1 billion in debt.
With that being said, I am not sure I fully understand the severe drop in Twilio. I see a lot of people talk about its inability to generate profit or tight margins. However, if a company is generating close to $1 billion in revenue every 3 months, I find it very unlikely that they are unable to turn on the switch, at any point, and start printing cash as needed.
Keep in mind that Twilio, like many companies in this space, deliver billions and billions of texts, emails, calls, and everything else every year. If they raise the price just by $0.005 yes, that's right, just a fraction of a penny, they would effectively almost double their entire revenue overnight. Twilio, for example, sends 130+ billion messages every year.
Anyways, that's it.
I've also marked some levels on the chart that I am looking at.
Comment
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OMG
Press the play button.
"With that being said, I am not sure I fully understand the severe drop in Twilio"
something ive been realizing recently after getting stopped on a couple of ideas - "lowest valuation" in x period of time or ever" is generally bearish, not a "deal". Look at how PYPL's P/E reverted higher after sinking - this is a result of lower earnings, not re-rating higher. Feels like the market is "ahead" of the trade on this
TWLO seems like the ultimate falling knife.
maybe it's a buy at some point, but my thinking is to let it consolidate and then take some risk on a breakout where you have momentum on your side and where you can define your risk to monthly lows or something
no need to be impatient, I don't think jumping in now with no clear exit risk defined is prudent
I'm def letting it set up first. Thanks for bringing it to light! It totally could be a candidate for a purchase one it gets some juju back.
scheplick
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@wolneyyy, Totally agree about the patient aspect. Will take time to really set up well
SPYvsGME
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Twilio is a great product. I created many integrated telephony systems using twilio over the years. By far the most under utilized feature of twilio is being able to track online marketing campaigns using dynamic phone numbers. The data provided to online paid advertisers is an untapped gold mine. The reason for such an explosion in value during covid was its capability to integrate VOIP, SMS and Video Conferencing into virtual office environments. My problem with Twilio was it's expensive to maintain. I had a hard time convincing execs the data was worth the additional costs. As inflation and rising dollar have a strangle hold on margins, products like Twilio will be the first to get downsized as workers return to the office.
scheplick
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@SPYvsGME, Love learning that you have created many telephony systems. The legend of SpyvsGME grows!
Sending positive vibes your way. So sorry to hear about your loss. Thanks for sharing your dad's story.
SquishTrade
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Excellent post, thanks for sharing @scheplick :) I especially liked your fundamental deep-dive and overview of this SaaS company's line of business. I would imagine inflation isn't affecting the inputs so much for companies like this with an exception perhaps for wage growth and rising rents. But unlike many other companies with tangible products, and supply chain issues, Twilio is purely technology based SaaS so inflation would likely affect it's business less perhaps.
TWLO seems like the ultimate falling knife.
maybe it's a buy at some point, but my thinking is to let it consolidate and then take some risk on a breakout where you have momentum on your side and where you can define your risk to monthly lows or something
no need to be impatient, I don't think jumping in now with no clear exit risk defined is prudent
I'm def letting it set up first. Thanks for bringing it to light! It totally could be a candidate for a purchase one it gets some juju back.