How Twilio Inc (NYSE:TWLO) Fits Into the Cloud Space Following SEND Acquisition

Some months ago, it was possible to look at Twilio Inc (NYSE:TWLO) shares and see a stock that was undervalued relative to the high-flying FANG stocks, or even relative to other cloud technology plays. However, at this point, we are talking about one of the high fliers that folks seem to site as a signal of market exuberance. So, the question we have in front of us today is this: How does the SendGrid (SEND) deal play into that picture?

One of the first points here is that the deal will almost certainly accelerate TWLO’s top-line growth picture. Cloud stocks are generally valued in EV/sales ratio, and a jump in sales growth expectations is going to help the fundamentals play catch-up with the massive rise in the stock’s price over the past 8 months, when the break-neck bull run got started on the company’s Q4 report in February.

Twilio Inc (NYSE:TWLO) has been running on the growth that was implied in that report. But the cloud theme got ahead of itself this year. There’s really not much doubt about that. So, the space is likely going to start sorting itself out into near-term winners and losers, and the SEND deal is likely a strong statement about which group TWLO will be in when the dust settles.

TWLO management would certainly cast it that way as well:

“Increasingly, our customers are asking us to solve all of their strategic communications challenges – regardless of channel. Email is a vital communications channel for companies around the world, and so it was important to us to include this capability in our platform,” said Jeff Lawson, Twilio’s co-founder and chief executive officer. “The two companies share the same vision, the same model, and the same values. We believe this is a once-in-a-lifetime opportunity to bring together the two leading developer-focused communications platforms to create the unquestioned platform of choice for all companies looking to transform their customer engagement.”



Twilio Inc (NYSE:TWLO), as you know, is a cloud communications platform that enables developers to build, scale, and operate communications within software applications in the United States and internationally. The company’s programmable communications cloud provides a set of application programming interfaces that enable developers to embed voice, messaging, and video capabilities into their applications.

The company managed to rope in revenues totaling $147.8M in overall sales during its most recently reported quarterly financial data — a figure that represents a rate of top-line growth of 54.1%, as compared to year-ago data in comparable terms. This deal will likely push that number up over coming quarters, so today’s rebound should come as no surprise (the stock is up over 10% off its morning lows at this point on a proverbial V-bottom reversal as the market digests the deal).

That said, there’s also no question that the value proposition for TWLO shares certainly isn’t what it was in February, and the broad market is showing signs of late-cycle wear-and-tear, which denotes the broad outlines of a corrective process.

In any corrective process, you are always going to see funds downshift from growth to value a bit, and fund of funds reallocate on the same basis. And, even if we take the rosiest view of the SEND impact for TWLO, we are still going to end up with maybe 11-12x EV/sales, whereas the highest growth software names are trading at about 10x on next year’s sales

It really comes down to one question (and it’s more about the market and investor sentiment than it is about TWLO): Is that premium valuation appropriate given the company’s growth and margin outlook relative to its software peers?

While the SEND deal is a good fit for the company – providing a boost to sales growth estimates and fitting snugly into Flex as an API solution – it may not be able to prevent a further corrective process over the near-term time horizon.

Given the swing in sentiment around the “cloud bubble” stocks, there’s a good chance you will have a better opportunity to pick up exposure here even though this deal is certainly a positive move — which is a gift.

This is a great company. And corrections are the means by which great companies should be bought, hand over fist.

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