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Will Twilio Be a Trillion-Dollar Stock by 2050? – The Motley Fool

Twilio's (TWLO 2.66%) The stock closed at an all-time high of $443.49 on February 18, 2021. This marks a 2,857% increase from its June 2016 IPO price of $15, giving it a market capitalization of $72.8 billion. This is 26 times the revenue it generates in 2021.

But now, Twilio's stock price is about $68, and its market cap is $12.4 billion, less than three times its expected 2024 revenue. Stock prices plummeted as growth cooled and rising interest rates compressed valuations.

Image source: Getty Images.

Twilio caused a huge firestorm for investors who bought its stock at the height of the meme stock mania, but it has still generated a sizable return of more than 350% since its IPO. Should investors expect the company to regain momentum, return to all-time highs, and grow into a $1 trillion tech giant over the next 30 years?

Is Twilio saturated in its core market?

Twilio's cloud-based platform handles integrated voice calls, text messages, video, and other content for mobile apps. Rather than building these features from scratch (which can be time-consuming, buggy, and difficult to scale as your app's number of users grows), developers can write a few lines of code. You can simply outsource these functions to his Twilio.

Twilio then charges these customers.This includes: airbnb, Uberand door dash — There is a usage-based fee each time a user accesses the platform. Twilio works behind the scenes to make it easy for Airbnb guests to contact their host and her Uber passengers to send messages to their drivers.

Twilio's first-mover advantage in this niche market has allowed it to grow its annual revenue at a compound annual growth rate (CAGR) of 59% from 2016 to 2020. Some of that growth has come from acquisitions. However, at an investor day in late 2020, Twilio boldly declared that it could continue to grow organic revenue by at least 30% annually through 2024.

Twilio withdrew its outlook after growth slowed over the past two years. The company's revenue increased by 61% (42% organically) in 2021, but only increased by 35% (30% organically) in 2022. Analysts expect reported revenue to increase 8% in 2023.

The company blamed the slowdown on macro headwinds that are encouraging businesses to rein in cloud-based spending. While that may be true, it's also possible that the company has saturated its core market and is struggling to stay ahead of similar communication platforms such as MessageBird. bandwidthand EricssonVonage.

Analysts expect Twilio's revenue to only grow at a CAGR of 10% from 2022 to 2025. Meanwhile, Mordor Intelligence predicts that the global cloud communication platform market will still expand at a CAGR of 18% from 2023 to 2028. On a side note, these suggest that Twilio may have a hard time catching up with the broader market.

A mathematical path to a $1 trillion market capitalization

Assuming a stable price-to-sales ratio, Twilio would need to grow annual revenue at a CAGR of 17% from 2022 to 2050 to reach a $1 trillion market cap.

This may seem like a realistic goal for fast-growing cloud companies such as: snowflake, But there are no clear signs that Twilio's annual revenue growth can once again accelerate into the high teens. The broader cloud communications market may also mature over the next 30 years as mobile app market growth slows and cloud software giants grow. Amazon and microsoft Expand similar services.

As Twilio's business matures, investors will expect profitability to improve. Unfortunately, the company has consistently been in the red under generally accepted accounting principles (GAAP) since going public, and analysts expect it to remain in the red until 2025.

Three headwinds are holding back Twilio from being profitable. First, the usage-based model limits pricing power, gross margins, and overall platform stickiness. Second, telecom companies are seeing their gross profits squeezed by soaring fees for accessing their networks. Finally, the company still spends a lot of money on stock compensation to subsidize salaries, consuming 17% of its revenue in the first nine months of 2023.

Twilio recently announced a third round of layoffs aimed at stabilizing operating margins and reducing net losses, but the reduction in business will make it harder to remain competitive in the evolving cloud software market. There is a possibility.

Investors should look beyond Twilio's market cap

As Twilio's stock price continues to expand, it could rise further in the coming decades, but I think it will be very difficult for the company to reach a $1 trillion valuation by 2050. So instead of worrying about market cap fluctuations, you should see if Twilio can do that. We have successfully grown and evolved into a more diversified cloud-based communications services company. If the company can successfully complete this difficult transformation, it has the potential to grow from a large-cap company to a mega-cap company.

John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Leo Sun has a position at Amazon. The Motley Fool has positions in and recommends Airbnb, Amazon, DoorDash, Microsoft, Snowflake, Twilio, and Uber Technologies. The Motley Fool recommends bandwidth. The Motley Fool has a disclosure policy.

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