Twilio (NYSE: TWLO) and Unity (NYSE: U) found themselves soaring to their all-time highs during the wild growth and meme stock surge of 2021. Twilio’s stock skyrocketed to $443.49 in February, marking an incredible 2,857% gain from its 2016 IPO price of $15. Meanwhile, Unity’s stock peaked at $201.12 in November, representing a 287% rally from its IPO price of $52 in 2020.
However, fast forward to today, we see both Twilio and Unity trading at around $60 and $15, respectively. The once high-flying stocks took a nosedive as their growth slowed, and their lofty valuations were pricked by rising rates. The question now arises – are these fallen stocks ripe for contrarian investors?
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The Twilio Story Unraveled
Twilio’s cloud-based platform revolutionized how text messages, voice calls, and video features are integrated into mobile apps. By allowing developers to easily add these tools with just a few lines of code, Twilio simplified a process that was once cumbersome, prone to bugs, and difficult to scale. The company operates on a usage-based fee model, charging customers whenever they tap into its platform. Its technology functions seamlessly in the background, powering essential communications in popular services like Airbnb and Lyft, among others.
Initially riding high on the mobile app industry’s rapid expansion, Twilio witnessed staggering revenue growth at a compound annual rate of 55% from 2016 to 2022. However, a significant slowdown hit in 2023, with revenue climbing a mere 9%. The maturing app market, along with industry headwinds led by carriers imposing higher fees on third-party apps, hindered Twilio’s growth trajectory. Moreover, the company grappled with profitability challenges on a GAAP basis.
In the wake of stalling growth engines, Twilio faced pressure from activist investors, ultimately culminating in its founder and CEO Jeff Lawson stepping down in early 2024. Projections paint a modest future with expected revenue growth crawling at a CAGR of 7% from 2023 to 2026. While trading at a seemingly low valuation of two times this year’s sales, Twilio’s struggle to garner a premium in today’s volatile market looms large.
An Inside Look at Unity’s Trajectory
Unity’s freemium game engine disrupted the development landscape by bundling a rich array of tools essential for creating graphics, sound effects, and multiplayer functionalities into games. Its unified solution, catering to both indie developers and large studios, positioned Unity as a go-to platform. At its IPO, over half of the world’s mobile, console, and PC games were crafted using Unity’s suite of tools.
Following a robust 43% and 44% revenue growth in 2020 and 2021, Unity faced a slump in 2022 with only a 25% revenue uptick. This dip was attributed to challenges posed by Apple’s privacy changes on iOS, rendering its advertising algorithms obsolete, and a gaming market that plateaued post-pandemic boom.
To revive its advertising segment, Unity inked a merger with ironSource in late 2022, propelling its reported revenue growth by 57% in 2023. Nonetheless, analysts anticipate a 20% contraction in 2024 once Unity digests these inorganic gains and sheds underperforming businesses. Unity’s abrupt CEO departure in October 2023 following a controversial rollout of new “runtime fees” added further uncertainty to its outlook.
Forecasts paint a bleak picture for Unity, with revenue expected to trend downwards at a negative 1% CAGR between 2023 and 2026. Coupled with a persistent lack of profitability on a GAAP basis, Unity faces an uphill battle to stabilize its business. Despite the dim prospects, its stock appears attractively priced at roughly four times this year’s sales.
Choosing Between Twilio and Unity
Given the challenges besetting both Twilio and Unity, a cautious approach is advised for prospective investors. Until these companies reignite their growth engines or achieve profitability, they are unlikely to draw significant interest.
However, if a choice must be made, Twilio emerges as a more compelling option. Its ongoing growth, lower valuation, and comparatively lesser existential hurdles make it a marginally more appealing prospect. On the other hand, Unity’s integration with ironSource failed to deliver a panacea for its woes, warranting a prudent pause until its sales trajectory regains stability.
Considering Twilio’s Investment Potential
Contemplating an investment in Twilio demands deliberation. The Motley Fool Stock Advisor recently spotlighted 10 stocks forecasted to yield substantial returns, with Twilio conspicuously omitted. These selected stocks exhibit strong growth potential, contrasting with Twilio’s current position.
An illustration from history underscores the significance of timely investments. Reflecting on Nvidia’s inclusion in a similar list on April 15, 2005, one can visualize the staggering performance: a $1,000 investment back then would have burgeoned to a remarkable $711,657.
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*Stock Advisor returns as of August 12, 2024
Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Airbnb, Apple, Twilio, and Unity Software. The Motley Fool has a disclosure policy.