Twilio Shares Surge on News of Segment Acquisition; Target Price $375 in Best Case

Twilio Inc, a cloud-based communications platform-as-a-service company, said it would acquire the market-leading customer data platform Segment for about $3.2 billion in an all-stock deal, sending its shares up over 9% in pre-market trading on Monday.

The transaction will accelerate Twilio’s growth with a combined total addressable market of $79 billion, bringing Twilio one step closer to achieving the company’s vision of becoming the world’s leading customer engagement platform trusted by developers and companies globally, the cloud communications platform provider said.

“We believe the pairing could result in a game-changing opportunity for Twilio (TWLO). Segment is a leading independent Customer Data Platform and could act as a catalyst for TWLO to enter the ring with CRM and ADBE for the battle for Customer 360,” said J. Derrick Wood, equity analyst at Cowen and Company, who gave a price target of $350.

The deal is expected to close in the fourth quarter of 2020. Morgan Stanley & Co. LLC is serving as exclusive financial advisor to Twilio and Cooley LLP as legal advisor. Qatalyst Partners is serving as exclusive financial advisor to Segment and Goodwin Procter LLP as legal advisor.

Following this announcement, Twilio’s shares surged over 9% in pre-market trading on Monday, trading 2.7% higher at $321.54. The stock is up over 220% so far this year.

Twilio stock forecast

Twenty-two analysts forecast the average price in 12 months at $313.75 with a high forecast of $375.00 and a low forecast of $225.00. The average price target represents a -1.17% decrease from the last price of $317.46. From those 22, 18 analysts rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is $270 with a high of $370 under a bull scenario and $200 under the worst-case scenario. The gave an “overweight” rating. Twilio had its price target increased by Argus to $330 from $310. Royal Bank of Canada boosted their price objective on Twilio to $375 from $320.

Other equity analysts also recently updated their stock outlook. Canaccord Genuity boosted their price objective on Twilio to $310 from $215.00 and gave the company a “buy” rating. Robert W. Baird lifted their target price to $340 from $315 and gave the company an “outperform” rating.

Analyst view

“A top-quality asset in our communications software framework. B2C communications has long needed an overhaul, which TWLO is able to provide. COVID-19 can act as an investment accelerant. Gating item to growing today remains how many customers have developers, which could be helped by expanding SI relationships. TWLO’s competitive moat growing. Applications product growth can improve overall margins,” said Meta A Marshall, equity analyst at Morgan Stanley.

“TWLO has seen a meaningful uptick in valuation as COVID-19 led to an acceleration in need for digital communication channels. This outweighed previous concerns over reduced travel/hospitality revenue and long-term growth profile. While enthusiasm is high for the remainder of 2020, concerns around COVID-19 activity in 2020 creating difficult comps in 2021 are weighing on investors’ minds.”

Upside and Downside Risks

Upside: 1) Management breaks out applications growth metrics, drives higher margins. 2) Major SI partner added. 3) New use cases like contact tracing, education and telehealth expand TAM meaningfully – highlighted by Morgan Stanley.

Downside: 1) COVID impact is short-lived, volume falters and investors discount reoccurring vs recurring revenue. 2) Use cases fail to expand, challenges net expansion. 3) Investors put a larger premium on margins.