How An Extended Relationship With Amazon Affects The Bull/Bear Case For Twilio

William Blair’s Bhavan Suri expressed a bullish stance on Twilio Inc TWLO, given that the stock has declined 50 percent from its September peak and that there is upside potential to the current consensus forecasts.

Suri maintained an Outperform rating on the company.

The Bull Case

The analyst believes “the complexity of the company’s technology is underestimated.”

Suri pointed out that Twilio’s “agile, custom, contextual, and less expensive communication capabilities are disrupting inflexible, traditional communication systems,” while its platform-based business model creates multiple growth vectors.

The analyst also believes the company has a long growth runway, given that penetration of the “large and growing” market opportunity is still low, while continued investments in its product suite and network connection are likely to help Twilio maintain its dominant market position.

The Bear Case

On the other hand, Suri noted that the company’s technology could easily be replicated, which in turn would help new players to enter the market or allow companies to build communication systems in-house.

In addition, the possibility of Amazon.com, Inc. AMZN entering the communications market could add to the already intense competition, although rumors that Amazon was thinking of expanding its partnership with Twilio have lessened the potential threat.

The analyst also stated that Twilio’s gross margins are lower than average and were “unlikely to reach typical SaaS levels of 75 percent-plus because of the need to pay network servicing fees to deliver its products, which does not support its current valuation.”