Recently, I wrote about the shortage of strong tech IPOs and the difficulty of identifying winners. Last month, Twilio, a prominent San Francisco tech startup, announced plans to go public. That ignited hopes that this could be the tech debut investors have been waiting for.
Twilio describes itself as a cloud communications platform. You may recognize it as the business that sends text messages for other businesses from Uber to retail stores. And, there are some good reasons why the Twilio IPO is one of the most promising ones we’ve seen in a while.
The Twilio Niche
Twilio is a large, rapidly growing business. Though you may not have heard of Twilio, you have heard the names of many of its customers from the ride service Uber to retailer Nordstrom (NYSE: JWN) to the mobile instant messaging service WhatsApp. Twilio, which is seeking to raise up to $100 million, was valued last year at $1 billion. While Twilio is still losing money, its revenue has more than tripled over the past two years, from $49.9 million in 2013 to $166.9 million in 2015
Twilio has carved out a niche in the Cloud. While the cloud has transformed technology to the point that virtually all enterprise and consumer technology touches the cloud, it is no longer possible to gain an early-mover advantage in the cloud. Even First Data Corp. (NYSE: FDC), a cloud-based payment processing technology that processes about 41 trillion in debit-card transactions a year, has lost more than 20% of its value since going public last year.
But Twilio has positioned itself as a “cloud communications platform” that essentially offers a missing link in consumer services that is easier to buy than develop. If Uber sends you a text message to confirm your ride, in other words, you may not realize that the text message comes from Twilio’s, not Uber’s, technology.
As the Twilio IPO prospectus explains, “cloud platforms are a new category of software that enable developers to build and manage applications without the complexity of creating and maintaining the underlying infrastructure.” Twilio’s growing revenue shows that many established businesses have determined that its easier to outsource the messaging component of the business.
Other Factors in the Twilio IPO
Now for the downsides.
Twilio is still losing money. In fact, its loss widened to $35.5 million from $26.8 million the year before. Clearly many successful IPOs of money losing tech companies have preceded Twilio. Red ink is not a reason to dismiss the Twilio IPO or any IPO. However, it does add a layer of uncertainty to the company’s long-term prospects.
Twilio is dependent on one business for a large share of its revenue. The online messaging service WhatsApp has consistently accounted for more than 10% of Twilio’s business and last year it accounted for 17% of revenues. While Twilio has a large and growing base of customers, it still needs to diversify its revenue base.
The ultimate success of the Twilio IPO will depend on many factors besides company fundamentals, such as market sentiment.
All in all, it seems this business is worth a closer look. Going on the recent record of tech IPOs, it’s hard to wholeheartedly recommend any money-losing company at this point. But Twilio does make a technology that’s become pretty central to many of our online transactions. And that could translate into some real value.
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