Twilio Inc. (TWLO) and VMware, Inc. (VMW) are two established players in the cloud computing space. TWLO is San Francisco-based cloud communications platform that helps developers build, scale, and operate real-time communications within software applications. It offers a set of APIs that enable developers to embed voice, messaging, and video capabilities into their applications. VMW, in Palo Alto, Calif., develops computer, cloud, mobility, networking, and security products and services. It offers solutions across three categories: Software-Defined Data Center, Hybrid and Multi-Cloud Computing, and Digital Workspace – End-User Computing.
The prices of most cloud stocks soared to new highs last year thanks to COVID-19-pandemic-led remote working and learning trends. Investors’ interest in cloud stocks is evident in First Trust Cloud Computing ETF’s (SKYY) 42.2% returns over the past year.
With ongoing rapid digitalization and adoption of technologies such as artificial intelligence (AI) and internet of things (IoT), the cloud industry is expected to continue growing in the coming months. According to a Fortune Business Insights report, the global cloud computing market is expected to grow at a 17.9% CAGR between 2021 – 2028. Thus, TWLO and VMW could see increasing demand for their products and services.
But, while TWLO has gained 79.6% over the past year, VMW has returned 3.3%. And in terms of their past three months’ performance, TWLO is a clear winner with 22.7% returns versus VMW’s 6.5%. But which of these two stocks is a better pick now? Let’s find out.
On June 9, 2021, TWLO launched Journeys, a new product built on a segment customer data platform that allows marketers to easily build sophisticated customer journeys and orchestrate personalization at scale.
TWLO’s Journeys takes a new approach that enables businesses to quickly and easily build highly personalized customer journeys based on the most trustworthy and up-to-date customer data possible. This approach is expected to help TWLO progress in its goal of building a leading customer engagement platform.
On June 15, 2021, VMW and Cohere Technologies, a communication technology company, collaborated to develop an Open Radio Access network (O-RAN) solution to help Communication Service Providers (CSPs) improve network and spectrum efficiencies. Running Cohere’s software on VMW’s RAN Intelligent Controller (RIC) Platform will help CSPs deliver great user experience to their customers accessing 5G services.
Recent Financial Results
TWLO’s total revenue increased 61.7% year-over-year to $589.99 million for its fiscal first quarter, ended March 31, 2021. The company’s non-GAAP net income came in at $9.65 million, up 15.5% from the prior-year period. However, its non-GAAP EPS decreased 16.7% year-over-year to $0.05. For its fiscal first quarter ended April 30, 2021, VMW’s sales came in at $2.99 billion, representing a 9.5% increase from the prior-year quarter. The company’s non-GAAP net income for the quarter was $744 million, up 16.3% from the year-ago period. Its non-GAAP EPS came in at $1.76, up 15.8% from the prior-year period.
Past and Expected Financial Performance
TWLO’s revenue has grown at a 65.2% CAGR over the past three years. Its revenue is expected to increase 44.1% for the current year. The company’s EPS is expected to decrease 181.3% in the next year. And its EPS is expected to grow at a 20% rate per annum over the next five years.
In comparison, VMW’s revenue has grown at a 14.1% CAGR over the past three years. Analysts expect VMW’s revenue to increase 9% for the current year. Its EPS is expected to increase 9.8% in the next year. Its EPS is expected to grow at an 8% rate per annum over the next five years.
VMW’s $12.03 billion trailing-12-month revenue is six times TWLO’s $1.99 billion. VMW is also more profitable, with an 82.6% gross profit margin versus TWLO’s 51.4%.
Again, VMW’s ROE and ROA of 24.8% and 5.1%, respectively, compare favorably with TWLO’s negative values.
In terms of forward EV/Sales, TWLO is currently trading at 25.24x, which is 375.3% higher than VMW’s 5.31x. In terms of forward EV/EBITDA, TWLO’s 294.77x compares to VMW’s 14.85x.
So, VMW is the more affordable stock.
TWLO has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. However, VMW has an overall B rating, which represents Buy. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TWLO has an F grade for Quality. This is justified by its negative value for trailing-12-month ROE versus the 6.9% industry average. VMW, in comparison, has an A grade for Quality. This is in sync with its 24.8% trailing-12-month ROE, which is 262.1% higher than the 6.9% industry average.
TWLO has a D grade for Value also. This is in keeping with its 294,77x forward EV/EBITDA, which is 1610.8% higher than the 17.23x industry average. VMW has a B grade for Value, which is consistent with its 14.85x forward EV/EBITDA, which is 13.8% lower than the 17.23x industry average.
In addition to the POWR Ratings grades we’ve just highlighted, we’ve rated TWLO and VMW for Growth, Stability, Sentiment, and Momentum. Click here to see the additional ratings for VMW. Also, get all TWLO’s ratings here.
Click here to check out our Software Industry Report for 2021
The demand for cloud applications is expected to grow in the coming months with hybrid working structures likely to become the norm. But not every cloud-based company is expected to gain from the industry tailwinds. While VMW’s valuation seems to be justified based on its solid financials, TWLO’s sky-high valuation seems unjustified. So, we think it is better to bet on VMW to gain from the industry’s growth in the near term.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about top-rated stocks in the Software-SAAS industry. Click here to learn about top-rated stocks in the Software-Business industry.
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VMW shares were trading at $156.10 per share on Thursday afternoon, down $3.87 (-2.42%). Year-to-date, VMW has gained 11.29%, versus a 15.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More...
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