Goldman Is Positive On Twilio, But Present Valuation Is Reason For Caution

Goldman Sachs has started coverage of Twilio Inc (NYSE: TWLO) with a Neutral rating and $33 target price, saying it is "cautious" on valuation, despite acknowledging the company's revenue generation opportunities.

The $33 price target represents a downside of 23 percent from Friday's close of $43.

A Few Positives, But Broadly Cautious

Twilio provides a software platform that enables customers to easily add voice, messaging and video to their apps. Its platform saves customers up-front investment in order to expand the underlying infrastructure, as it also saves months or even years in deployment time.

"While we are positive on Twilio's ability to grow its customer base and expand revenues from existing customers as it continues penetrating developers worldwide, we are cautious on valuation at 13x CY17E and 9x CY18E EV/sales vs. the peer average at 5x and 4x, respectively," analyst Heather Bellini wrote in a note.

Related Link: Here's Why Twilio Could See 30% Revenue Growth

Bellini sees Twilio benefiting from strong growth in the number of web and mobile applications and developers increasingly turn to the company to help rapidly enable their applications with essential services, including voice, messaging and two-factor authentication.

Twilio estimates a total available market of $46 billion leveraging IDC estimates. Its top 10 customers made up 32 percent of revenue in 2015. This includes WhatsApp, which accounted for 15 percent of total revenue in 2015.

Looking Ahead

Bellini highlighted Twilio's opportunity to expand sales within its customer base, potential growth from international expansion (only 15 percent revenue ex-United States) and the addition of new customers to its base of 28.6 thousand active customer accounts. Of significance, the company's customer base rose 48 percent year-over-year last quarter.

"We believe Twilio has meaningful revenue exposure to software companies, including just over 10 percent from venture-backed startups, or unicorns with reported valuations of $1 billion," Bellini noted.

That said, the analyst does not anticipate the company to have positive operating margins or CFO on a full-year basis until 2018. Further, the company has a lower gross margin profile than many software peers, due in part to its carrier costs.

For 2016, the analyst expects EPS of ($0.57) and revenue of $244.5 million.

"[H]itting its operating margin target of 20+ percent will largely be dependent on its ability to maintain low S&M spend as a percentage of sales versus peers, which may be challenging if investments to grow enterprise/international sales do not bear fruit," Bellini added.

In the pre-market hours, shares of Twilio fell more than 4 percent to $41.26. Shortly after Monday's opening bell, Twilio was seen down 2.33 percent at $42.00.

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