Last updated on November 21st, 2022 at 07:25 am
Twilio has $3.6 billion in revenue and a market cap of $8 billion, down from $70 billion at its height. Here’s why gross margins can be fatal to a company:
Low gross margins
are bad for business in general. They eliminate your ability to profit in the future. The higher the cost of generating money, the less wiggle room you have to cover the operational complexity of growing that income.
In a time when money was never a problem, it was common to launch a product, grow it, and use its size to make it more efficient. When money is scarce, you are driven to seek efficiency. However, righting the ship at scale is much more difficult.
Twilio made $2.8 billion in revenue and $1.4 billion in gross profit (49% margins) in 2021. This margin has fluctuated, averaging 54% during the last five years. significantly better than companies such as Opendoor or Bird. But that didn’t stop Twilio’s stock from plummeting by more than 45% last week.
So, what exactly is going on?
“fell from about negative 15% to negative 31% over the last 12 months,” according to Twilio’s explanation.
A market that gave a lot of growth quickly started tearing margins apart as if they were being looked at through a magnifying glass.
Twilio scored well in terms of growth, increasing revenue by 2,000% since its IPO.
So, why is Twilio trading at 1.5x revenue, whereas companies like Datadog and Atlassian trade at 10–15x revenue?
Keep in mind that Twilio has 50% gross margins.
Silicon Valley Curse
that $2.8 billion in revenue right away? Twilio pays 2.5 times as much. “In Silicon Valley, the closer we get to a peak-y [values] area, the more bullish we get about lower margin business models,”
“One thing that happens in Silicon Valley – and this has been quite cyclical – the closer we get to a peak-y [values] area, the more bullish we get about lower margin business models,”.
TLDR: Margin matters. Unit economics are difficult, and they rarely improve with scale (usually).