Analyst Note| Nupur Balain |
Narrow-moat Twilio reported strong third quarter results, supporting our thesis that Twilio is well-poised for robust future growth, reflected by a rapidly expanding customer base (growing 21% year on year) and an increasing number of relevant use cases for its software. The coronavirus pandemic has sped up digital adoption; as customer engagement has largely moved online, it has facilitated the need for large-scale, rapid communications afforded by Twilio's platform. We continue to assign Twilio a narrow moat rating, with the company's admirable results supported by strengthening switching costs as it rolls out more use-case-specific products and targets enterprise clients. Our narrow moat rating is also substantiated by 97% gross retention and 120%-plus dollar based net expansion rates, indicating businesses' growing reliance on Twilio's platform. With excellent retention metrics, expansion of solutions API offerings, and increased focus on enterprise penetration, we believe Twilio has a large growth runway ahead. As a result, we are increasing our fair value estimate to $302 from $153. Shares were down modestly after hours, likely on the back of lower-than-expected management guidance for the fourth quarter, which does not incorporate the impending Segment acquisition. We currently view shares as fairly valued.