Twilio Inc (NYSE:TWLO) was the first unicorn IPO of the year. It took place last week with an incredible timing that allowed the company to benefit significantly from a day of a sharp uptrend in the markets, just one day before the Brexit decision. Twilio is avery exciting company with its excellent products being implemented in mobile apps across segments and markets of the U.S. economy with an impressive clients list that includes Uber, Facebook (NSDQ:FB), WhatsApp, Coca Cola (NYSE:KO), Nordstrom (NYSE:JWN), and more. Twilio has a strong financial record with a massive top line growth pace of 86% YoY, narrowing losses and continuously improving adj. EBITDA margin. After many disappointing tech unicorn IPOs, there was a near market consensus that Twilio is a unique investment opportunity.
During the days preceding the IPO, optimistic Brexit polls’ results from the U.K. and growing buzz around the Twilio IPO drove the company to up its initial price range, from a $13 mid-point range to $15, valuing the VC-backed company at $1.2B. The bullish sentiment in the market was much stronger than anticipated and triggered a significant 19% intraday rally in stock price, which is presented below and reflects a staggering 92% increase over the IPO price. Like most companies, Twilio did not dodge the market collapse on Friday; its price dropped 8%, which is a substantial decrease, but the stock is still valued at 77% over its IPO price.
Twilio's debut day performance shows that the market had been waiting anxiously for a significant tech unicorn, with a great success story, that is not neglecting its profitability to increase revenues. Even though it was somewhat impacted by a temporary, bullish, market sentiment, the incredible first-day pop could be a great indicator of the market’s appetite for such IPOs. However, in case the Brexit fallout continues or even expands, the IPO market will return to its freeze. As it seems right now, Twilio took a very large risk in going public one day before the U.K. referendum – a decision that was beneficial for the company in retrospect but could have been devastating in other referendum scenarios. Its revenue multiple doubled, soaring to 12.5, and with exceptional uncertainty in the markets, many investors will not buy into Twilio with such a steep valuation.
The biggest problem of Twilio is that, in times of great uncertainty and macroeconomic instability, investors run to investment safe havens like the US dollar, Swiss franc, US Treasury bonds, low-yield corporate bonds, and stable dividend mega caps equities. In this process, the first securities that investors get rid of are securities of high-growth tech companies like Twilio, which, in my opinion, should expect an extended drop in stock price in upcoming weeks. For investors who bought the stock on the day of the company's IPO and still hold on to it, this is bad news, but many investors who thought that the first-day rally reflected a steep valuation might find the projected decline as an opportunity to enter Twilio.
Looking ahead to the next significant IPO next month by the Japanese messaging app Line (LN), I think that the primary driver behind the IPO's success and the decision to go through with it will be the markets' reaction to the UK referendum. It is still too early to call whether the IPO market is unfreezing, and global macroeconomics will have a huge impact on that. Judging by Twilio’s first-day performance, we see that the market has an appetite for high-profile unicorn IPOs; however, the Brexit changed the market sentiment, and Line will probably decide to postpone the IPO if the instability continues. Line filed for an IPO both in New York and in Tokyo—two economies that were less impacted by the Brexit than other economies were. It is very possible that Line will postpone the New Yok offering and go ahead with the Tokyo offering if the Japanese markets calm down anytime soon.
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