Twilio Sells Off Following SendGrid Deal, But Analysts Remain Bullish

Twilio Inc TWLO, a cloud communications platform, said Monday it reached an agreement to acquire SendGrid Inc SEND, a digital communications platform that specializes in mass e-mailing.

Here's a roundup of how some of the Street's analysts reacted to the merger.

The Analysts

• JMP Securities' Patrick Walravens maintains an Outperform rating on Twilio with an unchanged $86 price target.
• Canaccord Genuity's Richard Davis maintains at Buy, unchanged $80 price target.
• KeyBanc Capital Markets' Brent Bracelin maintains at Overweight, unchanged $99 price target.
• William Blair's Bhavan Suri maintains at Outperform.

Twilio shares were down 3.4 percent to $73.62 at time of publication. The stock earlier hit an intra-day low of $66.80.

JMP: 4 Positives, 1 Negative

Twilio's acquisition of SendGrid has four main positive takeaways, Walravens said in a research report.

• SendGrid's developer model is similar to Twilio's.
• SendGrid's digital communication platform complements Twilio's programmable communications cloud.
• Native e-mail API functionality is likely a requirement for large Flex deals.
• SendGrid boasts a superior gross margins of 76 percent versus 54 percent.

The "most interesting aspect" of the deal occurs outside of the company as Byron Deeter of Bessemer Venture Partners, the largest investor in both companies, will increase his ownership in Twilio from 9.5 million shares to 13.3 million shares.

On the other hand, the main disadvantage has to do with the price tag. The $2-billion acquisition offer represents around 20 percent of Twilio's market capitalization and an EV/revenue multiple of 10.1 times on 2019 estimates and 8.3 times 2020 estimates. Walravens said this raises questions as to why the company didn't opt to build these capabilities in-house or if there was a bidding war for SendGrid.

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Canaccord: Creation Of One Platform

From a strategic point of view, the acquisition "makes a lot of sense," Davis said in a note. The combined entity will be able to offer one platform all customer communications needs, including voice, messaging, video, and now e-mail. In addition, the two companies share similar visions and a developer-focused business model which increases the likelihood of the merger being a "good fit."

The equity nature of the deal also offers SendGrid's investors the potential to gain from upside in Twilio's stock since the transaction values the stock at $36.92, which is below the stock's 52-week high of $38.66.

KeyBanc: Consistent With Strategy

The acquisition is consistent with management's focus on improving the strategic value of its Engagement Cloud products and moving up the stock with new app-like features, Bracelin said in a note. In fact, the complete absence of an e-mail API in Twilio's portfolio was a "curious" omission and a feature that was likely being explored internally.

With the introduction of Flex, however, Twilio's need for an e-mail channel became "much more pressing," the analyst wrote. As such, the acquisition could be seen as an opportunity to create a single platform of choice for omnichannel customer engagement.

William Blair: Revenue Synergy

Twilio's management is not expected to offer any revenue synergy guidance but the deal should create "meaningful" opportunities in the future, Suri said in a note.

Specifically, SendGrid's customer base stands at more than 74,000 and Twilio has 46,000 customers with minimal overlap in their respective customer base. This should generate meaningful cross selling opportunities while the approximate 2 million developers on Twilio's platform represents a "significant resource" to expand adoption of SendGrid's e-mail APIs.

Related Links:

4 Reasons Why DA Davidson Is Bullish On Twilio

KeyBanc: 5 Reasons To Be Aggressive On Twilio