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It is no surprise that the markets are displaying volatility. Inflation is the worst it has been in years, the federal research has announced that it will start to raise interest rates next year, a new covid variant has caused stocks to sell off once again.
While the Nasdaq Composite is still within 10% of all-time highs, the broader tech market is really telling us a different story. According to a recent article in Forbes, If you take the Nasdaq Composite and exclude the Nasdaq 100 companies, the unweighted average distance from the 52-week high on December 17th was 43%. That is a big drop when you look at it compared to the broader index.
A big part of this is because companies like Apple, Microsoft, Google, and other mega-caps have an outsized weighting on the index and have held up quite well as they become a flight to safety.
What this means is that some great tech stocks have been pulled down with the broader market and thrown out with the bath water and that’s exactly what I want to look at today.
After going through hundreds of stocks that are doing 20,30,40 and even 50%, I’ve found one were quarterly revenue has accelerated in 2021 vs 2020 and its customers continue to spend more as they continue to be customers…
The company I’m talking about is Twilio Inc. (TWLO), a cloud -communications-platform-as-a-service company (CPaaS), that allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions using its web services API. Unsurprisingly, Twilio took off during the pandemic and rose over 400% as many companies shifted to remote work. As mid-year rolled around there was a shift in what investors were looking for and many tech stocks started to sell off. It ended up being fairly indiscriminate selling and what this has done is lead us to great companies that are now selling at great deals.
Last quarter Twilio grew its revenue at 65%, no small feat after growing 52% the same quarter last year. The reason for this, it the possibilities of its software. Many kinds of applications require the ability to connect with their customers through talk and text, and as more and more of our lives go digital, Twilio’s potential base of customers will continue to widen.
Twilio has been skillful at expanding its core product set, adding Segment, a leading customer data platform as well as email marketing tools through its acquisition of SendGrid. They are even launching new products like Twilio Live, a programmable platform for building interactive live streaming experiences.
Prospects for Rebound
Twilio is one of the best examples of a company expanding its product suite with complimentary businesses and because they price services by usage, its revenue grows when the underlying apps it powers does. This is why their net retention rate is over 100%, meaning if they didn’t bring on any new customers, the current ones are spending more money. This all gives Twilio a powerful growth engine. It also helps to have major customers like Lyft, American Red Cross, Coca-Cola Enterprises, AirBnB, Salesforce, Dell, and many others. While the stock may not be considered cheap trading at a price in the mid $200’s, it is trading at the median valuation for a software as a service company. One of the reasons for the sell-off this year is that is that organic growth is slowing down as it went from 50% two quarters ago to 38%. Even at that level, the drop has presented a good risk/reward scenario at this price. Given their growth, if the market turns around, it could shoot right back up.
The industry is healthy and if you look at some of the other players, companies like Vonage had their API segment grow revenue at 43% YoY and LivePerson saw growth at 50%, citing low penetration rates in messaging.
Twilio has set a long-term target of greater than 30% annual growth over the next 4 years and, while that is a slowdown from where we are today, if they can keep that up, while improving gross margins, the business is worth significantly more than where it is today.
Cheers and good investing,