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Twilio: Solid Earnings With A ChatGPT Catalyst

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Twilio (NYSE:TWLO) is simply a starring communications arsenic a services package institution which offers a scope of automated matter and chat features. The institution is known for having a scope of iconic customers crossed various industries from Morgan Stanley (MS) to nan American Red Cross and moreover Airbnb (ABNB). But what astir group don't cognize is OpenAI, which founded nan viral level ChatGPT, is besides a customer, and nan business has offered integration pinch nan GPT-3 model, since 2020! Thus, Twilio could beryllium poised to use from nan tailwinds crossed nan AI industry, which is forecast to beryllium worthy complete $1.3 trillion by 2029. In this post, I'm going to break down Twilio's business exemplary and its AI related products, earlier breaking down its 4th fourth financials and valuation. Let's dive in.

ChartData by YCharts

Business Model and GPT-3 Opportunity

Twilio fundamentally offers a Communications arsenic a work [CaaS] and was ranked 2nd successful this class pinch 4.4 stars retired of 5 connected nan G2 reviews website. Its level is mostly utilized to nonstop bulk matter messages to users, done its MessagingX platform. This besides integrates pinch nan wide celebrated WhatsApp, which has complete 2 cardinal users and Meta (META) has made it a strategical privilege to monetize.

Twilio Products

Twilio Products (Twilio)

MessagingX besides allows a "Chat" functionality that offers a conversations API aliases Application Programming Interface. The beautiful point astir this is Twilio has enabled an API integration pinch OpenAI's connection exemplary GPT-3 since 2020! This is nan overmuch larger version of nan viral level ChatGPT, astatine 175 cardinal parameters versus 20 cardinal parameters. In Twilio's 2020 blog post, nan institution outlines really to build a chatbot, pinch Twilio SMS, Python and of people GPT-3. Here you tin spot an illustration from nan 2020 trial below, these are elemental questions but nan possibilities are endless for exertion merchandise integration etc. For example, alternatively than waiting for a nutrient transportation and checking your phone, you could simply inquire "When will my nutrient transportation arrive?" aliases moreover "Could I get Chinese nutrient delivered successful 15 minutes if I wanted it?" arsenic an example.

GPT-3 example

GPT-3 illustration (Twilio)

In addition, its merchandise tin beryllium utilized to create a personalized "chef" which tin beryllium utilized to inquire for look ideas via matter message.

Personalized Chef

Personalized Chef (Twilio and GPT-3)

Twilio besides released an updated blog station successful 2022, which outlines specifications of really to group up an "AI Friend" to talk to (see beneath image).

AI Friend GPT-3

AI Friend GPT-3 (Twilio)

Now, of course, this is cool worldly but you whitethorn beryllium thinking, really could this beryllium useful? While ideate a support aliases thief table usability which integrates straight pinch GPT-3 aliases moreover a unreality based telephone halfway which connects nan chatbot to a matter to sound generator. That could prevention companies millions of dollars connected customer work staffing. Now of course, we cognize GPT-3 is not unsocial to Twilio and nan institution offers its API to everyone. However, Twilio has nan unsocial advantage successful that it already offers galore of these connected services "at scale", which is nan cardinal including its celebrated unreality interaction halfway work Twilio Flex. This work is already utilized by a scope of notable companies from HubSpot to Chime, Electrolux etc. In addition, nan unreality interaction halfway marketplace is forecasted to turn astatine a coagulated 22.7% compounded yearly maturation complaint and beryllium weighted astatine ~$57.37 cardinal by 2027. Then of course, GPT-3 could beryllium integrated pinch "Twilio" frontline a celebrated level utilized by salespeople and customer work teams for customer connections.

The cardinal enhancements Twilio tin adhd to GPT-3 is standard and personalized customer service, advertizing and interactions. This tin beryllium accomplished via integration pinch "Twilio Engage" and "Segment", which was a customer information level acquired successful 2020, for a staggering $3.2 billion. This level already enabled Domino's Pizza (DPZ) (a Twilio customer) to trim its customer acquisition costs by 65%, done hyper-personalised advertising. I judge an integration pinch GPT-3 could further heighten this process and nan full onboarding, boosting Twilio's customer growth.

Fourth Quarter Financials

Twilio reported beardown financial results for nan 4th fourth of 2022. Its gross was $1.02 billion, which hit expert forecasts by $23.49 cardinal and accrued by 21.58% twelvemonth complete year. While its Data & Applications gross accrued by faster 25% twelvemonth complete twelvemonth to $118 million.

Revenue

Revenue (Q4 '22 report)

Notice connected nan supra chart, nan maturation complaint for Twilio has slowed down importantly complete nan past mates of years. From a blistering 65% maturation complaint successful Q4 '20 to 48% by Q1 '22 and now conscionable 22% YoY maturation for Q4 '22. I judge this slowing maturation was driven by a mates of factors. Firstly, nan "recessionary" situation which of people results successful little request and frankincense usage. Given Twilio offers "pay arsenic you go" pricing, this was expected, and I will talk much connected this successful nan "Risks" section. In addition, I noticed nan institution has grown its world gross publication from 27% successful Q4 '20 to 34% by Q4 '22. Thus, this whitethorn person besides impacted nan maturation complaint successful nan past mates of quarters owed to nan precocious US dollar comparative to astir different currencies specified arsenic nan euro.

International Revenue

International Revenue (Twilio)

Moving onto nan positives and notable customer wins. The institution reported that OpenAI is simply a customer of Twilio arsenic good arsenic a partner. Its viral level ChatGPT mentioned anterior uses "Twilio Verify" for relationship information and frankincense worked seamlessly to standard pinch nan immense influx of users, which is simply a testament to its products quality. This should enactment arsenic a affirmative motion for early processes.

On its net call, guidance besides announced a "seven figure" woody pinch a Fortune 500 institution for an relationship information package. In addition, Twilio expanded its business pinch nan largest slope successful America, JPMorgan Chase & Co (JPM), to leverage Segment pinch Twilio Engage for marketing. It was awesome to spot traction crossed a scope of Twilio's products and various industries, which is awesome for diversification.

The institution reported 110% nett dollar retention rate, which was affirmative arsenic it intends customers are staying pinch nan level and spending much done relationship description . However, this was down from nan 126% retention complaint successful Q4 '21. I judge this was chiefly driven by customers slowing down description and little demand, owed to macroeconomic factors. However, I don't judge this will beryllium a imperishable inclination arsenic nan system is cyclical by nature.

Retention Rate

Retention Rate (Q4 '22 report)

New Focus connected Profitability

Twilio's guidance has announced a awesome business restructuring and a attraction connected profitability. For example, nan institution has reduced its headcount by 17%, which was chiefly driven by reducing "layers" of mediate management, arsenic good arsenic salespeople related to Twilio's communications product, arsenic they pivot backmost to much of a "product led" maturation strategy. In addition, nan institution plans to trim its beingness agency abstraction and galore worker "perks" specified arsenic a sabbatical program. Overall, this is apt not awesome for worker morale, but location is nary uncertainty profitability is important successful this climate. The institution besides announced plans to trim its banal based compensation which should beryllium a awesome positive, contempt it taking a fewer years to instrumentality nan programme fully, pinch it contributing to betwixt 10% and 12% of gross by 2027, down substantially from ~19.9% for nan afloat twelvemonth of 2022.

The institution still has a agelong measurement to spell to scope profitability and reported antagonistic $214.4 cardinal successful operating income for Q4 '22. A affirmative is this is an betterment complete nan antagonistic $287.8 reported successful Q4 '21. Twilio besides reported net per stock [EPS] of antagonistic $1.24, which hit expert expectations by $0.08. On a non-GAAP, ground nan institution is "profitable" pinch EPS of $0.22, which besides hit expert expectations by $0.30. You tin besides spot nan gross profit figures connected nan floor plan below, up 20% twelvemonth complete twelvemonth to $518 million.

Gross Profit

Gross Profit (Q4 '22 report)

Twilio has a coagulated equilibrium expanse pinch $4.155 cardinal successful rate and short-term investments. In addition, nan institution reported $1.227 cardinal successful full debt, but nan mostly of this $987 cardinal is semipermanent indebtedness and frankincense manageable.

Valuation and Forecasts

In bid to worth Twilio, I person plugged its latest financial information into my discounted rate travel valuation model. I person forecast 14% gross maturation for "next year" which successful my exemplary refers to nan afloat twelvemonth of 2023. This forecast is based upon management's guidance of betwixt 14% and 15% gross maturation for Q1 '23, which I person extrapolated retired for nan afloat year. This is astatine little maturation complaint than nan 22% reported successful Q4 '22, but I expect this owed to nan macroeconomic environment. In years 2 to 5, I person forecast a faster maturation complaint of 23% per year. I expect this to beryllium driven by improving macroeconomic conditions, accrued depletion etc., arsenic good arsenic tailwinds from AI and unreality interaction halfway deployment.

Twilio banal valuation 1

Twilio banal valuation 1 (Created by writer Deep Tech Insights)

To summation nan accuracy of my model, I person capitalized R&D expenses which has boosted nett income. In addition, I person forecast a 19% pre-tax operating separator successful nan adjacent 10 years. Management is forecasting GAAP profitability by nan fiscal twelvemonth of 2027; thus, I person extrapolated this inclination to proceed arsenic nan business scales. I forecast accrued upsells and cross-sells to its platforms specified arsenic "Segment", which should thief to heighten this margin. This whitethorn look optimistic, but it is beneath nan ~23% mean operating separator for nan package company, according to New York University data.

Twilio banal valuation 2

Twilio banal valuation 2 (Created by writer Deep Tech Insights)

Given these factors, I get a adjacent worth of $95 per share. TWLO banal is trading astatine ~$70 per stock astatine nan clip of penning and frankincense is ~25.67% undervalued, according to my exemplary and forecasts.

Twilio besides trades astatine a value to income ratio = 3.3, which is 79% cheaper than its 5-year average.

ChartData by YCharts

Risks

Recession/Lower Demand

As mentioned prior, Twilio operates galore of its products via a "Pay arsenic you go" aliases "Pay arsenic you use" model. This is awesome erstwhile request is precocious during nan "good times" specified arsenic 2020. However, fixed galore analysts person forecast a recession for 2023, slowing maturation and little relationship description is expected.

Final Thoughts

Twilio is simply a exertion leader successful nan world of online communications and has galore tailwinds, from nan maturation successful unreality interaction centers to integer trading and perchance moreover AI, pinch its GPT-3 integration and having ChatGPT arsenic a customer. Despite nan reliable economical backdrop, nan institution has still produced coagulated financial results and progressively focusing connected profitability which is simply a affirmative sign. Its maturation complaint has slowed down complete nan past respective quarters, but this is expected, owed to nan macroeconomic environment. Given my intrinsic valuation exemplary indicates nan banal is undervalued and its CEO/Founder Jeff Lawson has announced to beryllium personally buying $10 cardinal worthy of shares, I deem nan banal to beryllium a affirmative semipermanent investment.

This article was written by

Deep Tech Insights floor plan picture

Senior Investment Analyst for Hedge Funds. Interviewed Hedge Fund Managers and CEO's. Investment Strategy: Focus connected Deep Dive Valuation, G.A.R.P (Growth astatine a Reasonable Price). Masters successful Equity Valuation, 755+ Companies Analysed.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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