William Blair Remains Bullish on Twilio (TWLO) Despite Negative Sentiment Post Bull/Bear Debate

In a note to clients Tuesday, William Blair analysts Bhavan Suri and Sarah Shizas highlighted their recent bull/bear luncheon on Twilio (NYSE: TWLO).

The analysts noted investor sentiment was generally bearish with investors citing concerns that the company's software could be easily replicated, low switching costs, below-average gross margin profile, revenue fluctuation associated with WhatsApp, and in-app push notifications driving declining SMS usage, with the biggest point of contention around the company’s valuation.

Despite the sentiment and bearish concerns, the analysts remain bullish on the stock, especially since shares have come down over 50% from its peak in September, and they believe there is upside to current consensus estimates.

They highlighted the following bull/bear points:

Bulls

• Twilio’s agile, custom, contextual, and less expensive communication capabilities are disrupting inflexible, traditional communication systems.
• The platform-based approach creates multiple growth vectors, enabling expansion without meaningful incremental sales-and-marketing investment.
• There is a long runway for growth given the low penetration of the large and growing market opportunity, which we estimate is roughly $11 billion, with room for multiple players.
• Continued investment in its already broad product suite and extensive network connections should enable the company to maintain its leading market position.
• Gross margins are sustainable with higher value-added services such as voice, video, and IoT.

Bears:

• The technology can be easily replicated and/or built internally, enabling new players to enter the market or prompting companies to build communication systems in-house.
• There is intense competition in the communications market with low switching costs and the possibility of Amazon (AMZN $772.54; Outperform) entering the space.
• Gross margins are lower than average (56.5% in the third quarter of 2016) and are unlikely to reach typical SaaS levels of 75%-plus because of the need to pay network servicing fees to deliver its products, which does not support its current valuation.
• Revenue growth can fluctuate given the high concentration of a single customer (WhatsApp represented 10% of total revenue for the nine months ending 9/30/2016).
• Declining SMS usage due to the prevalence of in-application push notifications poses a threat to Twilio’s

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