4 Reasons Why DA Davidson Is Bullish On Twilio

Cloud communication provider Twilio Inc TWLO is considered a leader within the communications-platform-as-a-service space and is becoming an increasingly vital component for companies to build mobile applications, according to D.A. Davidson.

The Analyst

D.A. Davidson's Rishi Jaluria initiated coverage of Twilio with a Buy rating and $99 price target.

The Thesis

The bullish case for Twilio is fourfold, Jaluria said in the Tuesday initiation note. (See his track record here.)

• The CPaaS industry is growing in importance, and firsthand checks indicate Twilio boasts a "significant mindshare" among developers and next-generation companies, the analyst said. 
• Twilio's developer-centric model focuses on product development and reliability, Jaluria said. As a result, the company can spend more on research and development and less on sales and marketing compared to its competitors, he said.
• Twilio's financials are impressive and highlighted by total revenue growing at a compounded annual growth rate of 68 percent from 2013 to 2017, while base revenue grew at a 72-percent CAGR over the same time period, the analyst said.
• Finally, the company's operating leverage looks impressive given a 4,900-basis point improvement in operating margin from 2013 to 2017, Jaluria said. The momentum has legs, the analyst said, adding that Twilio should be able to show investors a non-GAAP profit and become free cash flow positive this year.

The $84 level Twilio shares were trading near Tuesday implies an 8.2 times multiple on EV/2020 estimated revenue, Jaluria said. D.A. Davidson's $99 price target is based on a 9.8 times multiple, which is a premium to peers, yet warranted given the company's leadership position and higher growth rates, the sell-side firm said.

Price Action

Twilio shares were trading higher by more than 1 percent to $80.38.

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