Twilio

We are discontinuing analyst coverage of Twilio.

We will discontinue analyst coverage of Twilio on or about Sept. 11. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our fair value estimate for Twilio is $190 per share, implying a 2026 adjusted P/E multiple of 32 times.

We model a five-year compound annual growth rate, or CAGR, of 13%. We expect an expanding customer base, combined with increasing penetration among existing customers, to drive robust growth in the coming years. We think the company’s expanding product portfolio, notably the solution-specific applications, such as marketing campaigns, will help in both regards and contribute to larger deal sizes and higher average revenue per user. We also expect the fledgling application offerings to drive the software-as-a-service mix higher from approximately less than 10% today, thus improving revenue visibility.

Because of its exposure to nonscalable network carrier fees, Twilio generates significantly lower gross margins than most SaaS companies. The company’s GAAP gross margins have declined from 57% in 2016 to 49% in 2025, compared with a normal range for software companies of 70% to 85%. Approximately 80%-90% of cost of sales is network carrier fees, so we see a structurally lower gross margin for Twilio relative to software companies in general. Conversely, we do see expansion possibilities as we expect application software to grow in the mix. Overall, we think the best-case scenario for the firm’s gross margins over the long term could approach the lower end of the typical software range. Beyond gross margin expansion over time, we also see scale benefits throughout all expense items leading to higher operating margins. We model non-GAAP operating margin expanding from 18% in 2025 (actual) to the mid-20% area in 2030.

We assign Twilio a no-moat rating. We still believe the company benefits from high customer switching costs among its existing customer base on its application programming interfaces and applications, while its Super Network business benefits from both switching costs and a network effect. However, the company has not historically generated returns that have exceeded its cost of capital, nor do we expect it to throughout the next five years, which precludes us from assigning the company a narrow moat rating.

Our low conviction in Twilio’s return profile stems from the fact that the core messaging business represents 50%-60% of revenue and generates lower margins than we typically see for more mature software companies. Non-GAAP gross margin for the messaging business is in the 30%-35% range, compared with the typical software margin of 70%-85%, and Twilio’s overall margin of approximately 53%. This limits the numerator in the return on invested capital calculation. Additionally, the company’s acquisition history has added substantial goodwill and intangible assets to the balance sheet. The amortization of intangible assets further weighs on returns. Relatedly, the goodwill on the balance sheet represents a significant expansion of the invested capital base. Lastly, Twilio’s application business has been slower to gain traction than what most investors (including ourselves) were initially anticipating. Taken together, we think this limits the company’s ability to produce excess returns through a mid-term horizon.

Beyond our concerns surrounding returns, we think Twilio’s software and messaging businesses are sticky, and there is a strategic rationale for having both units. We also think the company’s Super Network for its core messaging business benefits from a network effect.

Switching costs for software are often driven by several factors, in our view. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and re-training employees on a new system. Additionally, there is operational risk of changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take in excess of a year in bad cases. Lastly, lost productivity is likely to be an issue as customers move up a learning curve on the new system, along with the distraction of users involved in the function where the change is occurring.

Retention metrics typically help inform investors on both the presence and the durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of the customer spending is retained by the software provider after a given period. Twilio’s customer retention has been strong at approximately 95% for its larger customer base, although overall net retention has declined from approximately 143% in 2018 to slightly above 100% more recently. Net retention of less than 100% is unusual in a negative sense for a software company. Software firms regularly see higher retention rates for enterprise customers relative to smaller customers, and Twilio serves a wide variety of customers from small and medium-size businesses to large enterprises.

Twilio is a cloud-based communication-platform-as-a-service provider. Its core platform allows users to integrate a wide variety of communication capabilities into software applications from other vendors. The tools behind the firm’s solutions include APIs, software development kits, prebuilt integrations, and other ready-made communication applications. Twilio’s solutions address all communication channels, including voice, video, email, text messaging, and messaging on major social media platforms to help drive better customer experience.

The company operates in a three-layer pyramid, with the Super Network serving as the foundation, the communication cloud made up of communication APIs and other intelligent services, and the engagement cloud's solutions as the top layer. We think Twilio’s CPaaS solutions are mission-critical, while the core messaging solution is not as clear-cut. In our view, some usage of the Super Network is mission-critical, while other instances are more discretionary. Further, we view the messaging business as commodity-like.

We think most people have had an interaction based on Twilio’s software without thinking about the underlying technology. Appointment reminders, delivery notifications, and order status updates sent via text message and “click-to-call” functionality embedded in a website are all basic examples of Twilio’s platform. Uber and Airbnb use Twilio to connect operators to customers via text messaging, Box uses Twilio for security verification via text messaging, and Zendesk has embedded calling into its customer service software via Twilio. There are too many unique use cases to list.

Twilio is the clear leader in CPaaS by any measure, be it market share, presence, revenue, IT consultants, or product portfolio. The company's solutions are easily adopted by developers, who are unencumbered in terms of how they build out their communications capabilities, so solutions can be creative and unique. Given the company's approach to targeting software developers in its marketing and selling strategies, adoption is friction-free. Once a communication node is established and inserted into a company's workflow, it becomes immediately hard to replace. The ease of adoption means the firm is having success in supplanting traditional communication applications from legacy vendors.

However, we have lingering concerns about the company’s gross margin profile, hefty M&A, and ability to generate excess returns on capital in the near future. We think the business pieces are in place to perhaps carve out a moat in the future, but we are in wait-and-see mode on the company’s return profile.

Twilio is the clear leader in a rapidly growing industry for CPaaS. It has earned this lead through superior technology and unique targeted selling to software developers that involves easy implementation and rapid deployment.

Twilio is gaining momentum after flatlining exiting the covid lockdowns. Management is also driving aggressive operational improvements, which should help margins.

Product development and acquisitions have meaningfully expanded the portfolio, allowing for cross-selling success. As software solutions expand within the revenue mix, gross margins should expand.

We expect Twilio’s margins to be structurally lower than software peers because of network carrier access fees. Margins should increase over time, but carrier fees may hinder that progress at times.

While Twilio is acquisitive and mainly does small technology-driven deals, it has completed several large transactions. Not all have gone smoothly.

Twilio is a young company in an emerging niche, so we expect fluid competitive developments from large and small peers alike. AI is also an emerging area that is a possible competitive threat.