One of the ways we scoop up long-term winners is to wait until after the IPO hype subsides and the six-month lockup agreements expire. The extra supply creates selling pressure at a time when there isn't much new incremental demand. For companies with very strong fundamental stories, these times create opportunities for long term investors. We've seen this movie before. Our target on this one is $72. Their next earnings report is scheduled for February 7th, 2016.

[UPDATE: Since we started writing this, Oracle (ORCL) bought Apiary. This comes after Google bought Apigee (APIC) late last year for $625M. There have also been rumblings that Mulesoft is considering an IPO, but we wouldn't be surprised to see them acquired instead. This API space is absolutely strategic in terms of new software infrastructure. And *today* we get Cisco stealing the AppDynamics IPO on the day of pricing! Read on for more...]

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Twilio (NYSE: TWLO) came public in June 2016 and the shares soared over the next three months to touch $70. Three months later the stock is back in the $20's. The decline can be blamed on the usual suspects - the half-life of IPO hype and the expiration of share lockups which adds supply into the market. A big chunk of shares came off lockup on December 20th, then a small one in early January. Finally, the last large chunk will come in February. (Because the company did a secondary, the pending lockup expiration is staggered.)

With the February lock-up expiration still to come, the stock is likely to be range-bound until that extra supply gets absorbed. Then the shares should be able to make steady gains again.

Last week the head of AI at Baidu (Nasdaq: BIDU) proclaimed that "AI is the new electricity!" There is certainly plenty of hype around AI these days, but the truth is that we have finally reached a kind of tipping point where the amount of online data combined with increased processing power can finally accomplish something.

If this metaphor for AI is true, then investors can consider TWLO the wires that connect sources of electricity to end points that do work. We think of Twilio more like plumbing and pipes but the infrastructure idea is what's important. Every connected application needs to communicate and work in concert with other connected applications. Twilio is a resource for developers that need to embed capabilities like messaging, calling and other communication services directly into their application.

The developer aspect is an important distinction because there are many online services like Zapier, IFTTT, Build.io Flow, etc. These services are set up to share data and coordinate operations between existing applications. So for example, if you want to send an email when a new item is added to a dropbox folder or adjust your smart thermostat when your location is close to home. In terms of the "stack", these types of applications would still be built upon the basic infrastructure that Twilio provides.

What about competition? 

Competitors for TWLO fall into two categories - the big companies in this space are Amazon and Google with Microsoft making some inroads. These three all offer hosted infrastructure with Amazon being the furthest along with AWS. Historically, AWS has focused heavily on compute and storage resources but they had also provided basic messaging tools. At the recent AWS re:Invent conference, a number of announcements show where Amazon is going. There wasn't much offered in terms of additional API capabilities and what was offered were new features that helped developers with API development and exploitation *within AWS applications* versus between those applications and other systems.

There are some low-cost options like Plivo, Nexmo and Sinch, but they all basically compete with Twilio on price rather than quality, functionality and support. Analysts who follow the space conclude that if you don't have funding, one of the low-cost options might make sense but if you are able to spend the money then Twilio is the way to go. With that landscape and limited funding, the low-end players are probably not a threat.

Twilio has a few advantages which provide at least a modest "moat" around the business:

• The first is that they are integrated into existing applications. It's not impossible to switch out Twilio for something else but it's not easy or very high on any anyone's priority list as long as the company continues to provide support. And because developers (over 1M so far) are very familiar with the Twilio API suite, they are apt to continue to use it for new applications too.
• They have built their own network of server infrastructure across the globe. This offers improved reliability and performance for their customer base. For many applications, slow delivery, lost messages, garbled or dropped voice calls or patchy video are not acceptable. This is similar to what Akamai (AKAM) did in their early days by building their own network of servers in the cloud to deliver content reliably.
• Visible leadership in the category *plus* a substantial amount of cash (~$300M) makes it difficult for competitors to gain enough traction to hurt Twilio. It's a large enough lead to deter most companies from even investing in building a competitive solution. The large companies in the space have the money to spend but they want to improve the capability *on their own platform* versus across platforms. The nature of communication as a category a major part of the value is in the breadth of coverage and the near-ubiquity of coverage.

We've looked at this one long and hard and have not been able to come up with a credible competitive threat. We are on the watch for how the new Twilio video platform features play out. It's success (or lack thereof) might have an impact on long-term growth, but it's too soon to tell how this will play out.