Value Analysis of Twilio Every Investor Should Read

Services-Prepackaged Software company Twilio stunned Wall Street today as it surged to $66.35, marking a 4.05% change compared to the S&P 500 and the Nasdaq indices, which logged 0.059% and 0.12% respectively. TWLO is -21.02% below its average analyst target price of $84.01, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Twilio has underperfomed the S&P 500 by 56.0%, moving -63.52%.

Twilio Inc. provides a cloud communications platform that enables developers to build, scale, and operate customer engagement within software applications in the United States and internationally. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.

Twilio does not release its trailing 12 month P/E ratio since its earnings per share of $-6.78 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for TWLO of -9.79. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

To better understand the strength of Twilio's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Revenue (k) Operating Expenses (k) Operating Margin YoY Growth
2022-12-31 $3,826,321 $3,018,885 -31.5% 2.23%
2021-12-31 $2,841,839 $2,306,297 -32.22% -15.15%
2020-12-31 $1,761,776 $1,408,562 -27.98% 14.17%
2019-12-31 $1,134,468 $978,702 -32.6% -83.87%
2018-12-31 $650,067 $464,461 -17.73% n/a
  • Average operating margins: -28.41 %
  • Average operating margins growth rate: -16.52 %
  • Coefficient of variability (lower numbers indicate less volatility): 22 %

Twilio's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations (k) Capital Expenditures (k) Free Cash Flow (k) YoY Growth
2022-12-31 -$254,368 $80,182 -$334,550 -125.72%
2021-12-31 -$58,192 $90,021 -$148,213 -459.74%
2020-12-31 $32,654 $59,133 -$26,479 15.46%
2019-12-31 $14,048 $45,368 -$31,320 -1189.77%
2018-12-31 $7,983 $5,109 $2,874 n/a
  • Average free cash flow: $-107,537,600.00
  • Average free cash flow growth rate: -351.95 %
  • Coefficient of variability (lower numbers indicating more stability): 130 %

The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if TWLO's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 0.0% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Twilio's P/B ratio of 0.893 indicates that the market value of the company is less than the value of its equity -- a potential indicator of an undervalued stock.

As of first quarter of 2023, Twilio is likely overvalued because it has a negative P/E ratio, an exceptionally low P/B ratio, and irregular and negative cash flows that are on a downwards course. The stock has poor growth indicators because of its consistently negative margins with a negative growth trend, and no PEG ratio. We hope this analysis will inspire you to do your own research into TWLO's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.