Cloud Winners, Still Winning

January 17, 2021

With a new president confirmed and new stimulus agreed in the US, markets continue to perform well.

Cloud companies continue to excel, with expanding TAMs and extra relevance whilst people and businesses continue to work from home.

Twilio

Thesis - Twilio makes it easy for tech companies and startups to build communication into their apps. They provide APIs that can automate text messaging, send transactional emails and make calls. It’s perhaps best understood with use-cases. For example, Airbnb use Twilio to improve communication between guests and hosts. When a guest messages a host and the host fails to respond, Airbnb uses Twilio to send an automatic SMS message to the host and nudge them for a response. This improves the experience for Airbnb and can be done without further human intervention. Another example, Deliveroo use Twilio to enable masked phone calls from the rider to customers. This means a rider and customer can call to discuss a food drop-off without either exchanging their mobile numbers, maintaining privacy. If these use-cases still don’t resonate, it’s useful to know that Stripe, Lyft, Salesforce, Yelp, Twitch, Zendesk, Coca-cola, M&S and many more are also customers. They have a usage-based business model, which means they make more revenue as the volume of communications increases. Twilio is in the sweet spot of offering a crucial service (communication) in a growing market (web applications), growing revenue over 50% YoY. They are known as being a technology-first company, with an easy-to-use product. Developers love Twilio because they make their job easier. Before Twilio’s APIs, adding communication to web and mobile apps was a difficult and expensive process. The stock has almost quadrupled since its March low.

Financials & Performance - Twilio has 208,000 active customers and last quarter announced $448m in revenue, up 52% year-over-year. Dollar-based net expansion was 137%, meaning from the same customers a year ago they earned 37% more money. This highlights their ability to grow both their breath of use-cases and volume of usage with a customer. The company is not yet profitable as it chooses to focus on growth. They have healthy gross margins of 53%. They have also shown an appetite to grow their business through bolt-on acquisitions. In 2019, they acquired SendGrid a provider of an email API and earlier this year they announced the acquisition of Segment, a customer data platform.

Leadership - Jeff Lawson is the CEO and founder of Twilio. He is a serial entrepreneur and was previously the founding CTO of StubHub. He was also a technical product manager at Amazon during the formation of AWS, giving him strong acumen as the leader of a cloud organisation. He has a 94% approval rating on Glassdoor.com.

Risks - As mentioned, the stock has quadrupled in value in a short space of time. The company is now valued at $62b, making is one of the larger players in the Saas space. However, this is a company that has sustained 50-80% revenue growth for 8 quarters and has bolstered its position during a period of technology acceleration globally.

twilio revenue growth

Elastic

Update - Elastic stock jumped 7% on the news they were changing their open-source software licensing. As a reminder, Elastic provides software tools that allow companies to utilise their internal data. Their primary product, ElasticSearch, allows companies to better query their data for search results. Elastic pride themselves on being an open-source company, which has meant their software is available for free on a self-managed basis. Whilst great for developer uptake, it can be concerning for investors. Essentially, the new license better protects against competition. It follows a similar move made by MongoDB in 2018, who have a similar business model and have been very successful after making the switch. This open-source licensing was previously seen as a business risk, so this move makes sense as part of the company growing-up and building a moat. CEO Shay Banon commented: “The community has come to appreciate that open-source companies need to better protect their software in order to maintain a high level of investment and innovation.”

This also followed an impressive quarterly announcement. Elastic grew revenues 43% YoY with their Saas revenues up 81%. They also announced 650 customers with annual contract value of over $100,000, up from 525 the previous year.

elastic stock chart

Axon Enterprise

Thesis - Axon Enterprise might be better known by the name of its first product, Taser. Axon enables law enforcement to better protect people without the loss of life. As well as the Taser, an electroshock weapon, they also produce body cameras, vehicle cameras and a suite of cloud-based tools to enable tracking, monitoring, dispatching and communication between law enforcement teams. Axon management have successfully grown the company from being simply a producer of devices, to an integrated technology solution. Axon’s mission “protect life, capture truth, accelerate justice” embodies a future without the negative headlines around police enforcement.

Financials & Performance - Axon have increased revenue between 20-30% annually for the past 4 years. As software (Axon Cloud) becomes a greater part of their business, they are targeting an increase in gross margins, from 62% currently to 70% in the future. Impressively, management have shown an ability to grow the business in breadth and depth at each stage of its maturity. Whilst still not profitable, they are the leader in an important niche with specialised relationships.

axon enterprise product development


Written by Stevan Popovic, growth investor, web developer and founder of this site.