Twilio

[SaulR80683]

Twilio

Here’s what I wrote in my January summary:

Twilio has been discussed at length on the board and I really have nothing to add. It’s a new small position this month. I bought it back basically because of the hypothesis that their non-Uber and non-FB revenue is growing at 60% and will hopefully soon make the Uber situation fall into the rear-view mirror. That remains to be seen. Also several board members made convincing cases for it, as did Bert. I took my initial position at $25.75, and added a little at $26.55

Here’s what I wrote in my February summary:

Twilio is now in 8th place at 5.9% of my portfolio… It was a new small position in January. I bought it back basically because of the hypothesis that their non-Uber and non-FB revenue is growing at 60% and will hopefully soon make the Uber situation fall into the rear-view mirror. Several board members made convincing cases for it, as did Bert. Based on the December earnings, it looks like what’s going to happen. I took my initial position at $25.75, and added a little at various prices before earnings. And then after earnings I added a bunch. Their non-Uber revenue was up 62% and their non-Uber dollar-based retention rate was 136%.

Here’s what I wrote in my March summary:

Twilio is now in 8th place at 7.2% of my portfolio… I had been in and out of Twilio, selling out because of all the pessimism about it becoming commoditized in the future. This was a new small position in January. I bought it back because the numbers talk, and their non-Uber/non-FB revenue is growing at 60% and will hopefully soon make the Uber situation fall into the rear-view mirror. Several board members made convincing cases for it, as did Bert. Based on the December earnings, it looks like they were right. I took my initial position at $25.75, and added a little at various prices before earnings. And then after earnings I added a bunch. Their non-Uber revenue was up 62% and their non-Uber dollar-based retention rate was 136%. Doesn’t sound to me like it’s being commoditized.

And here’s what I wrote at the end of April:

I sold of MongoDB to buy more Twilio, Okta, Pure, and a little Nektar. I also net trimmed my Nvidia and Shopify to buy more Twilio and Okta. (I like Twilio and Okta)

Twilio has moved up to 5th place at 10.8% of my portfolio, and a price of $41.65. I added a lot to my position this month. I had been in and out of Twilio, selling out because of all the pessimism about it becoming commoditized in the future. This current position was a new small position I took in early January. It’s grown as my conviction has grown. I first bought between roughly $24 and $27. The next month the price shot up and I bought an equivalent amount mostly between $30 and $32. Then, this month and last I added another bunch between $40 and $42. I came back to it in January because the numbers talk, and their non-Uber/non-FB revenue is growing at 60% and will hopefully soon make the Uber situation fall into the rear-view mirror. Several board members made convincing cases for it, as did Bert. Based on the December earnings, it looks like they were right. Their non-Uber revenue was up 62% and their non-Uber dollar-based retention rate was 136%. That doesn’t sound to me as if it’s being commoditized. They announced two new important products in March and April, Flex and Programmable Wireless, which I recently wrote about.

Here’s the key! This is disguised, or camouflaged, growth! Let me give you a concrete description, because it will make more sense to you that way (but approximate, as I’m not using exact numbers).

For simple calculating and visualizing, let’s say that they had $100 million of revenue last year, of which Uber made up 20%. Now we know that the non-Uber growth rate was 62%. Okay, so the $80 million that was non-Uber grew at 62%. In dollars, that comes to growth of $49.6 million. We’ll round down to $49 million. So this year, the non-Uber revenue comes to $80 million plus $49 million, which equals $129 million.

Now let’s say Uber revenue has decreased 75%, from $20 million to $5 million. Adding the $5 million to the non-Uber $129 million, and we get total revenue of $134 million, and it looks like Twilio was only growing at 34% from the $100 million they started with. (Actually they managed somehow to grow at 41%, but we won’t worry about that).

Now today, all the analysts are raising estimates. What I don’t understand is that what was going to happen was clear as day to me. Why couldn’t these paid analysts see it?

Best to you all,

Saul

[branmin]

Now today, all the analysts are raising estimates. What I don’t understand is that what was going to happen was clear as day to me. Why couldn’t these paid analysts see it?

Thank goodness they couldn’t see it. Added now on three occasions this year. Hence my previous post about the engine starting to rev up. Thanks to you mainly Saul as I noted how you had virtually doubled your position since Feb. Not something you do without reasoning.

[XMFMonkey]

Monkey would like to poke our friendly neighborhood Bear to chime in, since Monkey very much respects Bear and his contributions to our board.

Looking over Bear’s end of April portfolio, TWLO was conspicuously absent, and we know—-or think we know–– that Bear has read all of Saul’s posts regarding TWLO since it was a very large position.

And yet Bear did not buy-in, so perhaps it was for the same reason that the analysts didn’t see what Saul saw?

Bear: what sez you? Having a better understanding of what gave you pause would help us all identify future ways of thinking that might be detrimental to our banana supply (or honey, if you prefer, but that stuff gets all over your paws and is way harder to clean up, but to each their own).

Love,

Monkey (long TWLO)

[PuddinHead42]

Saul, thanks again to you and the board. I had a position in TWLO from a different recommendation and that got me studying it more. Your cogent discussion of the camouflaged growth was the final straw that convinced me to triple my position. Today it was my second biggest pop, with AAXN outperforming with a 22.33% rise.

For those not familiar, Axon was Tazer, but they renamed themselves when they got into the police camera business. this was not just selling cameras, it was really selling subscription services to store video evidence in the cloud. Just think of that data being stored forever and police departments paying subscribtions forever. I have to apologize to the board as I think I only teased it and never did a deep dive. I wish my life was in a position to do that, but I don’t make the time yet with work so busy. I keep hoping to get back in the contribution game and pay you all back.

Until then, thanks again and look into Axon.

[MusiCali]

Damm
Bummed I missed this
I think I was scarred from watching the meteoric rise and fall of TWLO from the ipo.

[MusiCali]

Question now is
Do those who have snoozed until now on TWLO (me)
Have to seriously think about reallocating funds from
Shop, sq, PSTG, Okta, ntnx and Ayx?
Confounded

[PaulWBryant]

Monkey would like to poke our friendly neighborhood Bear to chime in, since Monkey very much respects Bear and his contributions to our board.

Thanks for the kind words, Monkey. It’s funny, I held Twilio through most of 2017, seeing things very much the way Saul does now. Twilio was still growing most of their business at 60%+ and it was just being masked by the decline in Uber’s spend. What started to turn sour, in my eyes, were the margins. Saul and I discussed that after the December 2017 quarter in this thread: http://discussion.fool.com/twilio-32987862.aspx?sort=whole#32992… My main point was that cost of revenue was growing faster than revenue. I agreed with Saul that total revenue growth would speed back up.

Both things happened in this March 2018 quarter – revenue ticked up to 48%, but cost of revenue grew faster – at a 60% clip, to be exact. Exactly what we both expected.

A lot of times a company performs exactly like I expect, and yet the stock does the opposite. It is difficult to know what the market will react to, and when. Saul is better at that than I am.

That said, I never intended to write Twilio off as a lost cause. I was simply explaining why I was not a buyer then. I am still not a buyer today. But as long as they can keep growing at near 50% or higher, I expect Twilio will be ok. It just doesn’t sing my particular tune, to use a Saul phrase.

Bear

[brittlerock]

What I don’t understand is that what was going to happen was clear as day to me. Why couldn’t these paid analysts see it?

Saul, I think I can help you with this. First off, most if not all these analysts hold MBAs probably with a focus in finance. It really doesn’t make any difference what school they went to, because they all pretty much learned the same analytical methods. You might think that the older analysts who have been around the block afew times would’ve figured it out, but why would they? They’ve been doing the same thing the same way for years. They’ve got precious little reason to change their methods, tools and process.

Then there’s also the fact that they are barred either ethically or maybe even legally from investing in the stocks they analyze. It would be deemed a conflict of interest, so they have no actual skin in the game, providing even less motivation to discover “camouflaged growth.” If it’s not plain, old fashion growth that shows up quarter to quarter in the 8K/10K right where they look for it how can they be expected to see it. It was camouflaged after all.

You’re a different critter. You only analyze companies you’re either invested in or are interested in investing in. You are not assigned to analyze certain companies even if you’ve lost all interest in them. When a company stops being of interest, you move on. The Wall Street analyst moves on when his boss tells him to.

You’ve been at it for what, about 40 years? You’ve done remarkably well at it, better than almost every Wall Street analyst. You’ve trained yourself to look past the surface numbers in order to understand the reasons for the numbers. And you’ve got your own skin in the game.