Twilio Stock: The Cash Flow Monster Grows and Thrives
In just 4 weeks, the stock of the CPaaS market leader in my portfolio has corrected 35%. What happens next?
The CPaaS (Communications Platform-as-a-Service) leader Twilio was one of the winning stocks in my portfolio in 2024. In just 6 months, the price had initially more than doubled since I added Twilio to my portfolio in August 2024. Fortunately, I then took some partial profits at prices above $140 for my model portfolio at the end of January.
In recent weeks, TWLO 0.00%↑ shares, like many other SaaS stocks, have come under severe pressure, losing over 35% of their value since Trump became president.
It's time for an update on Twilio stock, given the extreme volatility of the past few months:
Twilio’s Financials For 2024
Twilio's financials for 2024 were significantly better than they were in previous years:
Revenue: Total revenue was $4.46 billion, up +7% year-over-year.
Profit:
GAAP basis: Operating loss narrowed from $1.2 billion in 2022 to $876 million in 2023 and further to $54 million in 2024.
Non-GAAP basis: After posting an operating loss of $5 million in 2022, Twilio generated an operating income of $533 million in 2023, which increased to $714 million in 2024.
Cash flow: Free cash flow was $657 million in 2024, up +81% from $363 million in the prior year.
In the fourth quarter of 2024, Twilio achieved GAAP operating profitability:
Revenue: Total revenue was $1.19 billion in Q4 2024, up +11% year-over-year. This marks a return to double-digit growth for Twilio in the second half of 2024.
Profit:
GAAP basis: The company reported an operating income of $14 million in Q4 2024, the first time Twilio has achieved GAAP operating income in a quarter.
Non-GAAP basis: Operating income was $197 million.
Cash Flow: Free cash flow in Q4 2024 was $94 million compared to $211 million in the year-ago quarter. This short-term negative cash flow development was also due to a change in the share-based compensation system. The company reduced share-based compensation and increased cash compensation to employees. This change resulted in higher cash expenses.
So Twilio's profitability took a big leap forward in 2023/2024. This is also due to the restructuring, which caused more than 40% of Twilio employees to lose their jobs in the second half of 2022.
Twilio Guidance for 2025
Twilio provided the following guidance for fiscal year 2025:
Revenue growth: The company expects organic revenue growth of 7% to 8% to approximately $4.8 billion.
Non-GAAP operating income: Twilio expects non-GAAP operating income to be between $825 million and $850 million, an increase of nearly +20%.
Free Cash Flow: Free cash flow is expected to grow by up to 30% and is also expected to be in the range of $825 million to $850 million.
At an Investor Day in January 2025, the mid-term plan for the next three years up until 2027 was introduced, which came as a very positive surprise to the investment community. In addition to sustainable GAAP profitability, the outlook for the following years included a reacceleration of growth and a significant expansion of margins and free cash flow.
Investors have been missing this combination of growth and profitability at Twilio for the past few years, under the old management. The new management team, led by CEO Khozema Shipchandler, who has been in the position since March 2023, is now delivering the stuff of investors' dreams, turning the SaaS company into a true cash machine.
Twilio's Goals Through 2027
Twilio is aiming for a sustained return to double-digit growth in the coming years. However, as the CEO made clear in his Investor Day presentation, this acceleration in growth is not even necessary to meet the company's conservative financial targets.
The current plan is to increase the non-GAAP operating margin from the current 16% to 21-22% by 2027.
A total of at least $3 billion of free cash flow should be achieved in 2025-2027 (e.g. $850 million/$1,000 million/$1,150 million in 2025/2026/2027) after $657 million in 2024.
If the current double-digit growth (which Twilio has already achieved in the second half of 2024) is confirmed in 2025 and beyond, margins and free cash flow are likely to be significantly higher than these targets.
Based on the statements made at the Investor Day, I personally believe it is very likely that Twilio's free cash flow will double to more than $1.3 billion by 2027 under normal economic conditions. However, if the U.S., and therefore the global economy, enters a recession under the Trump regime, these projections may not be sustainable.
The Twilio Stock Valuation
With a moderate EV/FCF ratio of 15-20, a $20-30 billion enterprise value for Twilio by 2027 under normal circumstances (i.e., no recession) would be very conceivable.
At a current share price of $95, Twilio's current enterprise value is around $13 billion and the EV/sales ratio is 3, which I think is a very fair price.
Twilio Is One Of The Real AI Winners
The new management is skillfully positioning Twilio as a beneficiary of the new opportunities around Generative AI. It is indeed very impressive that, according to their own data, 90% of the top 50 AI startups are all using Twilio to develop their AI services.
For example, OpenAI has integrated Twilio's tools to enable access to ChatGPT via phone and Whatsapp chat (#1-800-ChatGPT). The virtual AI recruiting assistant Olivia from Paradox.ai already schedules 25 million interviews per year based on the Twilio platform. In 2024, the company sent more than 800 million text messages using Twilio's communication tools.
These are impressive numbers that prove that Twilio could be one of the real AI winners.
Conclusion On The Twilio Stock
I made a real bargain with Twilio stock in the summer of 2024. After the significant correction, the stock is attractively valued at less than €100. Over the next three years, I am very optimistic that Twilio stock will be significantly more expensive than it is today.
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Disclaimer: The author and/or related persons or entities own shares of Twilio. This article is an expression of opinion and does not constitute investment advice.