Twilio just might grow into its valuation, Lorne Steinberg said

The ongoing digital transformation will be good for companies like Twilio (Twilio Stock Quote, Chart, Analysts, Financials NYSE:TWLO) but how good? That’s the billion-dollar question, according to portfolio manager Lorne Steinberg, who thinks there’s a tonne of growth already built into Twilio’s share price.

“This is a case where there’s incredible management, an incredible idea, they’ve executed incredibly well and that’s why it’s trading at such a lofty valuation and multiple of revenues. So, trying to forecast whether earnings will eventually catch up and make this an attractive stock is very difficult,” said Steinberg, of Lorne Steinberg Wealth Management, who spoke on BNN Bloomberg on Wednesday.

Twilio, the cloud communications platform which offers connectivity to businesses through its web service APIs, has covered a lot of ground in the last three months, bulking up by one third and moving from about $300 per share to $400. But that’s still a small leap compared to the moves the stock made between February 2020 and February 2021. TWLO gained over 275 per cent over that span as pandemic-related circumstances led to further adoption of technology where basically everything went online, from entertainment to meal and grocery ordering to remote work, learning, telehealth … the list goes on.

And Twilio’s Platform-as-a-Service was there to provide the connectivity between all those disparate applications, raising the company’s value just as revenues started coming in big time.

A case in point would be the company’s just-released second quarter 2021 earnings which featured revenue up 67 per cent year-over-year to $668.9 million and a net loss of $227.9 million or $1.31 per share compared to net income of $99.9 million or $0.71 per share a year earlier. Analysts had been calling for a net loss of $0.13 per share on a topline of $599 million. (All figures in US dollars.)

“Our strong momentum continued in the second quarter as our revenue growth accelerated at a run rate of more than $2.6 billion,” said Jeff Lawson, Twilio’s co-founder and CEO in a press release. “Companies across industries are adopting our platform to drive better, more personalized levels of customer engagement, and we remain convinced that we are in the midst of a massive shift that is driving a generational opportunity for Twilio.”

The company reported over 240,000 Active Customer Accounts by the end of the second quarter compared to 200,000 a year earlier, while it managed to close on the acquisition of toll-free messaging service Zipwhip over the quarter.

Looking ahead, management guided for third quarter revenue to land between $670 and $680 million and a loss per share of between $0.17 and $0.14 per share.

Steinberg said investors confident the company will reach the heights indicated by its current valuation may want to hold their noses and buy but he’s not having anything of it, at least for now.

“It is trading somewhere in the stratosphere, as a number of these companies are, so we would look for something else,” Steinberg said. “But what can I say? If management keeps on doing what they’re doing and this company keeps on growing at the rate it’s growing for the next 20 years, maybe it will justify the multiple.”

On Twilio’s future, CFO Khozema Shipchandler recently said at a JPMorgan investor conference that the spike in usage of the company’s platform during the pandemic is not a flash in the pan.

“I think on balance, what we see is durability in the emergent use cases, and I would call that generally a tailwind,” Shipchandler said. “Look at grocery stores that have turned to more online channels or order online and pickup-in-store. These have been proven convenient and lasting for customers.”

“We’ve committed during our investor day that we think we can do 30 percent-plus revenue growth over the next four years,” Shipchandler said.

On the recent acquisition of Zipwhip, a deal valued at about $850 million in an equal blend of cash and stock, Twilio said Zipwhip would operate as part of its Communications Platform Unit with Zipwhip CEO John Lauer reporting to Simon Khalaf, SVP and general manager of Twilio’s Communications Platform.

“Today’s digital economy has every business evaluating the best ways to interact with their customers. Across every industry, Twilio sees messaging as an increasingly popular, trusted, and effective way to engage,” said Khalaf in a July 14 press release. “We’re very excited to make Zipwhip a part of the Twilio team and to leverage our combined messaging expertise across all channels to offer businesses of all sizes the most robust suite of messaging offerings.”

Twilio closed trading on Thursday at $392.20 per share, down from $394.00 the day before. For the year, TWLO is up 16 per cent, while for the past 12 months the stock is up almost 47 per cent.