Breezy Briefings is pleased to present a brand new essay series by Abraham George titled CPaaS, Twilio, Blockchain and Tanla. Special thanks to Amit Mishra and Maneesh Jain for fact-checking and special inputs. Subscribe using the button above or Telegram to receive the latest updates as soon as it is published. This is Part 2 - if you missed the previous part, check out Part 1.
In Part 1, I briefly discussed CPaaS, its functions, applications and prospects. The biggest attraction of CPaaS, I reckon, must be its simplicity. And customizability. Easy to manage, integrated communications, a rich array of features. The advantage of scalability coupled with businesses only paying for the services that they actually use. All of this makes it cost-effective than investing in expensive and clunky on-premises hardware.
When I was setting up my quantitative hedge fund almost a decade ago, I remember that we had earmarked more than USD 50,000 for hardware and expensive (legacy) software. Now you don’t need any of that stuff. Thanks to cloud technology and SaaS vendors like Salesforce or Freshworks. No sunk costs, just a ‘pay-as-you-go’ model. The beauty of CPaaS is that it can even interface with many legacy systems.
Let’s look at some of the major players in this space. The 800-pound gorilla is Twilio. Then, RingCentral, MessageBird, Bandwidth, Vonage, Sinch to name a few.
About 13 years ago, Jeff Lawson started Twilio. A software developer, Lawson was also one of Amazon Web Services’ (AWS) earliest product managers. So, he brought in a lot of Amazon-esque ideas while launching Twilio. Twilio did its IPO in Jun 2016 - its IPO price was $16 but opened at $23.99 on its first trading day. It has had a meteoric rise in its share price since then. Currently, Twilio trades at $300 with a market cap of $53.6 bln. Prices had even risen to $457 in the early part of the year. It has been one of the top growth stocks of the past five years. It has around 250,000 customers and many app developers are integrating its communication tools.
Due to its first mover’s advantage in the CPaaS space, it has a tremendous leg up against all of its competition. For the last 5 years, it has had an average revenue growth of 44% and is expected to rise to 52% for the full year 2021. Most of Twilio’s growth rate was organic while it picked up small companies along the way which added value to their existing services. In 2019 and 2020, it made two major acquisitions by paying top dollar: SendGrid (2019) and Segment (2020). This was mainly to expand its ecosystem with additional features and boost its revenues.
The market may be a bit divided on Twilio’s valuation, but on balance, many are of the opinion that it is sustainable. I have seen many price projections for Twilio - one report even saying it can rise to $750 in three years.
But here is the main issue: since its inception, Twilio has not made any operating profits, let alone EBITDA. Now, its margins are contracting, its losses widening and the share counts are increasing. Not a great recipe for exponential growth! Compound to that, in a rising interest rate environment, how much of its liabilities have been hedged via IRS (interest rate swaps not the US taxman!) or similar instruments?
I am sure that they must have deliberated this. But, investors look for hard facts and cold numbers. As in the early years of Amazon, Jeff Bezos was also laser-focused on expanding his business in many different areas and increasing revenues. He started to monetize all his investments only in the last many years. As investors, if you were only focused on traditional metrics like P/E and EPS, you would have never invested in Amazon.
Also, Bezos is a visionary and adroit master planner beyond anyone’s imagination. If I recollect correctly, just a month before the dot-com crash, Warren Jenson his then-new CFO on the advice of Morgan Stanley’s Ruth Porat, issued $672 million worth of convertible bonds to secure his cash situation. If it were not for that, Amazon would almost certainly have been almost insolvent over the next year.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.
Hello Abraham. Loved your Write up and I do agree with you on the mention about how Tanla looks to be an interesting Business with Large Growth Area and Triggers. However I couldn't understand Why CPaaS Companies around the World have not made Money. While Most of them have actually not grown beyond a point of time, A Company like Sinch was able to Grow its Revenues and Profits Equally by almost 20x in 8 years. And Still Negative Returns for a While now. That is one Question I havent been able to Answer yet. It would be great to have your views on the same. Thank you and Looking forward for your future Write Ups.