Twilio Builds a Communications Dynamo

Jon Markman

There is a gold rush of sorts in customer engagement and one company, Twilio ((TWLO) -Get Report), is building the best storefront for the tools application developers need. 


On Monday, Twilio execs announced a $3.2 billion merger with Segment, a key competitor in the application programming interface marketplace. The all stock deal will create an API juggernaut.

In this case, bigger is way better -- and Twilio is a buy.

At its heart, the San Francisco, Calif.-based company is a cloud communications platform. Its software engineers have developed APIs, modular sets of code, that developers can easily plug into their online applications to make and receive telephone calls, text messages, video and chat.

If you have ever requested an Uber ((UBER) -Get Report) car or sent a Facebook ((FB) -Get Report) message to a friend on their birthday you’re probably engaged a Twilio API.

The beauty of the business model is that Twilio gets paid a small fee every time one of its APIs is employed. Keep in mind, the Twilio API platform was used 1 trillion times during 2019, and growth is only getting started. My own newsletter business uses Twilio gateways several times a day to send notices of new reports to customers by text message.

Adding Segment is a master stroke. Since 2010, Twilio’s cross town rival has been helping companies collect and manage their internal customer data using APIs.

Segment APIs work by allowing developers to pull customer data from one application as a building block, then seamlessly fit that information in another. Most companies use these APIs to integrate their customer service, marketing and analytics software.

The deal follows the 2019 purchase of Sendgrid, a large email API developer. Although email marketing may seem dated in the era of online chat and instant messages, the $3 billion deal was a critical building block for Twilio.

Sendgrid’s software tools focus on online purchase receipts, signup verifications, and password reminders. These transactional emails are part of the digital transformation process currently underway across many larger enterprises.

Combining Sendgrid, Segment and Twilio breaks down the data silos that gum up customer service. Companies will be able to instantly recognize customers, understand their needs, then send relevant communications.

It also makes Twilio a complete, end-to-end engagement platform, according to Jeff Lawson, chief executive officer. The company is building a storefront where developers can choose best-in-class APIs to build digital first applications to engage customers.

The evolution adds to a business that was already growing fast.

Twilio sales increased from only $89 billion in 2014, to $650 billion in 2018, and $1.1 billion in 2019. The company is tracking toward $1.4 billion in revenues this year. And during the second quarter, sales jumped to $401 million, up 46% year-over-year.

Developer accounts have grown to 10 million, up from only 2 million in 2017, according to an investor day slide presentation in October. Those gains are being driven by digital transformation strategies, accelerated by the global pandemic.

Telehealth, contactless delivery, distance learning and self-serve business models are all about finding new ways to engage customers. APIs, based on usage, are inherently low cost development tools, and their use is booming.

For example, Twilio managers note that 63 billion messages were sent using its APIs in the first half of 2020. That is nearly as many as all of 2017 and 2018 combined. And messages is only one part of the Twilio API platform.

The total addressable market for the platform is enormous. Lawson says the marketplace for email and marketing, channel APIs, account security, customer service and user experience will reach $79 billion by 2020.

With Segment, Twilio dramatically improves the suite of tools the company can offer to developers.

Investors understand the potential scale of this business. Twilio shares trade at 34x sales and a heart thumping 1,400x forward earnings. The stock is also up 247% in 2020. It is not cheap.

Still, this is an opportunity not to be missed. The rush to build transformative digital applications that are unique and reduce friction in the online world is only getting started.

Based on sales growth, Twilio shares should reach $490 during the next 18 months, a gain of 45% from current levels. Growth investors should consider buying Twilio into any weakness ahead.

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