This is a really short thesis I wrote about Twilio on August 2019, before the Segment and Zipwhip purchases, which I think further entrenches them. For as much as I looked into Twilio and liked them, I couldn’t pull the trigger and buy/own the stock due to valuation concerns. Action >>> words.

Source

Twilio thesis:

Twilio is a cloud communications platform that allows developers to embed APIs in their software to communicate with their customers. Twilio’s API’s allow a broad range of communications including programmable SMS, voice, video, email, and so forth. Twilio has multiple vectors of growth and several tailwinds happening simultaneously that should allow it to grow meaningfully in the coming years:

Growth vectors and tailwinds:

General growth of the economy and businesses that use Twilio. Because Twilio employs a usage-based revenue model, as companies like Wayfair and Nordstrom grow their business, so too will Twilio.
New customer use cases. Twilio invests in R&D to find new ways that companies can communicate with their customers. On top of that, companies themselves can come up with new use cases within their software. For example, Wayfair may only send order confirmations at first, and then add password update confirmations, shopping cart abandonment reminders, and so forth.
Customer communication is not optional. Every single business, application, website, or software will need to communicate with its customers. Therefore as the number of available apps and websites increases, Twilio will grow. My assumption is that virtually all digital businesses will eventually become Twilio customers, at which point Twilio will be able to cross-sell and up-sell more services to every business in the world. We’ve seen this recently with Twilio Flex, a SaaS call-center built on top of their own APIs, as well as Twilio’s recent purchase of Sendgrid to cross-sell email APIs to businesses already using Twilio’s SMS offering.

Tailwinds:

Growing on-demand economy: as Lyft and Uber grow, more customers will need to contact their drivers and vice versa. The same concept applies for AirBnb, Zillow, etc.
The shift to digital: more websites and apps means more customers for Twilio.
The shift to cloud

Does Twilio have a Moat?

Twilio’s moat is widely misunderstood. Although it may seem like Twilio’s business can easily be replicated because it is just sending standard SMS, I believe this is not the case.

First, channel proliferation is not slowing down. Every day, there are more endpoints for communication. SMS, Email, Facebook, WhatsApp, Voice, Alexa, etc. Twilio’s goal is to cover all means of communication and that is a difficult thing to do. Why would customers work with other businesses if they cover only certain means of communication?
Second, Twilio’s super-two network is now available in 100 countries (and a ton of carriers) and growing. This type of availability is difficult to have and requires a lot of work. Why would customers work with other businesses if they cover only certain countries and not all?
Third, Twilio’s APIs are most trusted. They strive for 99.999% uptime and deliverability and none of their API’s have ever been killed.
Fourth, developers will not switch to another service, for several reasons: (1) Twilio’s 99.99% uptime and availability gives them comfort that their code will work all the time, and switching to another service does not make any sense (2) It would be difficult for other businesses to steal customers given that Twilio probably had the lowest cost structure with all that volume
Lastly, and probably most importantly, gross margins are relatively low in this industry but it works for Twilio because of their developer-led go-to-market model and low sales and marketing costs. Competitors would need to outspend Twilio in a low-margin environment with much less revenue. Very unlikely.

Liviam Capital - Finding Reinvestment Moats

A very short (and old) thesis on Twilio from…