What's Going On With Twilio Stock Monday?

Piper Sandler analyst James Fish downgraded Twilio Inc TWLO stock rating from Overweight to Neutral and raised the price target from $56 to $71.

Shares are up ~40% since Q1's disappointing print, primarily due to bullish-sounding conference commentary, broader market moves, and potential activism. 

While Twilio may be finding more stability than prior quarters as crypto and other headwinds abate, the macro-environment uncertainty and recent divestitures will create 'messiness' for sales estimates ahead that are likely too high. 

Additionally, Fish sees the CPaaS space as the new CDN-space, the software portfolio slowing further, Twilio needing to use its ~$3.5 billion net cash for further Software M&A, management having already pulled 'self-help' levers, and valuation at these levels as fair. 

The analyst slightly adjusted his estimates and, with limited upside from here, is moving to the sidelines as he awaits better & cleaner top-line trends.

FY24 revenue estimate is $4.42 billion, down from the prior $4.46 billion, EPS estimate is $1.76. FY25 revenue expectation is $4.85 billion, down from $4.87 billion. EPS estimate was reduced to $2.33, down from $2.34.

Inputs point to some upside in Q2, though macro-trends remain challenging, and 2H23-2025 estimates appear too high organically and when including recent divestitures that result in lower revenue but higher gross profit margin. 

Additionally, enterprises are weighing SMS authentication, a use-case that likely accounts for >25% of their CPaaS business. 

The analyst writes that the CPaaS space is this decade's CDN, with similarities including multi-sourcing, usage models, networks as the fundamental value proposition, high expected market growth that has slowed faster than anticipated, dependency on 'events,' low margin, pricing dictated by carriers, and valuations stuck between telco and software.

Given these aspects, he believes valuation and multiple expansions are capped. 

Software grew 19% Y/Y in Q1 and will likely slow into the mid-teens by year-end, with the bulk of the business driven by CDP + CCaaS. 

The CDP/Segment products play a role in shifting from third-party cookies to first-party data, but trends remain weak, and Fish continue to hear customers adopting and bundling more from their CRM vendors. Additionally, Twilio Flex has had some recent successes but is behind in AI capabilities, and other CCaaS players are gaining share faster. 

The management has reduced headcount by 25% over the last year, divested underperforming and lower-margin businesses, and is trying to fix go-to-market and structural issues. 

The dual-share class is consolidated, and the analyst expects margins and FCF can outperform Street's estimates. 

While management is insistent on keeping CPaaS + software together, he thinks there is limited upside on a sum-of-the-parts basis at this current valuation.

Price Action: TWLO shares traded lower by 1.20% at $66.08 on the last check Monday.