• The chart shows the performance of internet infrastructure company TWLO over the last three years
  • Since the stock’s most recent peak on March 1, 2021, it has stalled, falling -17% in an up 12.5% tape[1]
  • Twilio has been a “dishonorable mention” in our pieces Junk Stocks, What Does Volume Mean, and one of our pieces about stock compensation being abused

Is Twilio’s Stock Price Today a SELL?

Please click here to see why our ranking model dislikes the stock and some simple reasons Twilio, Inc, a company focused on developing and publishing internet infrastructure solutions may be a great sell candidate for due diligence. 

TWLO Absolute Performance Over the Last Three Years

Behavioral finance documents the unfortunate tendency of investors to chase performance.  Formally known as “herding,” our team believes that Twilio may have been an outsized beneficiary of this conduct.  In our view, many investors are creating narratives to justify a valuation we believe is simply untenable. At the same time, we consider it prudent not to fight the tape. The stalling of the stock in the last 6 months on an absolute return basis and the underperformance on a relative basis combined with the untenable valuations may point to an opportune time to SELL.

Is Twilio a Top Short Stock?

The chart below shows the same chart as the one above.  The only difference?  The chart below shows Twilio’s price performance relative to the S&P500 over the last three years. Despite the stall since February, it has outperformed significantly.

TWLO Relative Performance vs SP500 Over the Last Three Years

How much has the stock outperformed?  The chart below shows that if the S&P500 just stayed flat, Twilio would have to fall 63% in a flat market to reach the broad index

TWLO Absolute Performance vs SP500

The data below is our Single Company Tear Sheet for Twilio. For all numbers, higher is better. The basics:

  • Valuation Quintile 1: the stock is expensive on sales to EV, earnings to price, provides no dividend, and its FCF/EV is in the 14th percentile as the stock generates a negative to flat FCF/EV
  • Balance Sheet Quintile 4: Twilio’s only “redeeming” feature is its balance sheet score due to the high cash balances – a typical trait of many of today’s “story stocks” which have raised equity and burn cash
  • Earnings Quality 1: while the stock has terrific scores on accruals and gross margin, overall, the business’ operating margins and ROA/ROEs are poor
  • Market Quality 1: As seen in the charts above – Twilio is possibly overextending, coming under pressure, and looks like it may break lower – and it may have a long way to fall should valuations, profits, or quality start to matter

Read on to see some notes on the firm’s shareholder presentation and other Twilio Inc. resources.

TWLO Single Co Heat Map

Twilio, High Prices, Big Losses, Heady Acquisitions and “New” Metrics:

Twilio is a fascinating company.  The market seems to have ascribed an enormous amount of value to the company’s future.  Since 2018 they have grown revenue from $650 million to $2.25 billion via a blitz of acquisitions.  Over that same short time, GAAP losses have exploded from -$122ml to -$731ml.

Others may disagree, but we hardly find this to be a compelling business model.  More incredible to us is that this firm is valued at over $60 billion.  In this day and age where “trillions” are tossed around with ease, one can be forgiven for losing sight of what $60 billion means.

$60 billion is 10% more than General Dynamics – a firm that generated over $4 billion in free cash flow in the trailing 12 months.  $60 billion is just shy of Colgate-Palmolive’s valuation.  Colgate has 8x the sales of Twilio and has generated sturdy and healthy profits for 20 straight years.

We believe this is the type of madness that underpins the mania in novel tech stocks today.

Summarily, the following make Twilio an interesting candidate for research in our view:

  • Unproven management
  • A business model that seems highly reliant on acquisitions
  • A myopic focus on revenue growth despite ever-rising losses
  • A valuation at levels that have a proven history of losing investors large amounts of money
  • Dubious accounting terms, metrics, and a dearth of disclosure and guidance

Below we added some text in bright red to ALL the slides from their investor presentation. Any time you see “KCR: WORDS,” that is the KCR research team – NOT the company!!   What we find remarkable is that the entire Twilio investor presentation is five slides.  How many $60 billion companies do you know that put out five slides to explain their entire business?  More remarkable still – the firm has made eight acquisitions YTD.  It is only September!

Twilio Earnings Presentation Q2 2021:

Twilio Earnings Presentation Q2 2021 1

Chart about Revenue Growth (no breakout of Organic) & Unproven “Growth Metric”

TWLO Qtrly Rev Growth

Two fairly arbitrary slides follow – top 10 customers and geographic mix:

TWLO Top 10 Customer Accounts and Geographic Mix

Select Notes from the Company’s Prepared Remarks on the Earnings Call:

Normally this is where the KCR research team puts some select notes from a company’s earnings call.  In this case…. there isn’t much of interest in our view.  A full copy of their prepared remarks can be found here.

What strikes us is the abundance of buzz words and the dearth of numbers or comments about how they plan on making money.  Even the CFO’s comments were fairly parsimonious on the details.  He cites three separate metrics for YoY quarterly growth.  None of them appear GAAP compliant.

Even more interesting – nowhere in the investor presentation or the prepared remarks is there a footnote guiding investors to a reconciliation of their non-GAAP metrics to GAAP metrics.   Others much wiser than us may know something remarkable about this company’s future.  But KCR’s views are formed by the intersection of current facts within the historical context.

In our minds, this company looks speculative in nature and potentially primed for a severe setback whenever more level-headed and rational methods of analysis prevail as they always have.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

[1] 03/01/2021 – 09/21/2021, TWLO total returns and S&P 500 Total Return Index

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

October 1, 2021 |

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