Better Tech Stock: Twilio vs. Unity software

Twilio (TWLO -1.37%) and Unit (U -2.65%) both hit all-time highs during the growth and meme buying frenzy in 2021. Twilio shares rose to $443.49 in February, representing a 2,857% gain from its initial public offering (IPO) price of $15 in 2016. Unity stock reached $201.12. in November, marking a 287% increase from its IPO price of $52 in 2020.

But today, Twilio and Unity are trading at around $60 and $15, respectively. Both stocks tumbled as their growth cooled and rising rates inflated their valuations. So should contrarian investors still buy any of these declining stocks?

Image source: Getty Images.

What happened to Twilio?

Twilio’s cloud-based platform powers text messages, voice calls, video and other features for mobile apps. Instead of building those tools from scratch — which can be buggy, time-consuming and difficult to scale — developers can simply add a few lines of code to their apps and outsource those functions to Twilio.

Twilio then charges those customers usage-based fees whenever they access its platform. Its technology works behind the scenes. For example, with Twilio, Airbnb guests can contact their hosts; Lyft riders can send messages to their drivers; and other companies can send text-based verification messages for their mobile apps.

Twilio initially benefited from the rapid growth of the mobile app market. From 2016 to 2022, its revenue grew at a robust compound annual growth rate (CAGR) of 55%. This growth was driven by its organic expansion as well as acquisitions of smaller companies.

But in 2023, Twilio’s revenue grew by only 9%. Its growth has slowed as the app market has matured and headwinds have led many of its customers to rein in spending. Twilio also struggled to expand its gross margins as carriers charged higher fees for third-party apps to access their networks. The company also remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis.

Twilio has been besieged by activist investors as its growth engines fizzled out and its founder and CEO Jeff Lawson stepped down in early 2024. Analysts expect its revenue to grow only at a CAGR of 7 % from 2023 to 2026. Its stock looks cheap at two years. times this year’s sales, but could struggle to attract a higher valuation in this volatile market.

What happened to Unity?

Unity’s freemium game engine brings together tools for creating graphics, sound effects, multiplayer features and other assets for video game developers. It also provides tools for monetizing games with in-app purchases and integrated ads.

This all-in-one solution makes Unity a popular development platform for both smaller developers and larger studios. At the time of its IPO, more than half of the world’s mobile, console, and PC games were created with its tools.

Unity’s revenue grew 43% in 2020 and 44% in 2021. But in 2022, its revenue grew only 25% as it faced two headwinds. First, Applehis (AAPL 0.20%) Privacy changes on iOS have made its third-party advertising algorithms obsolete. Second, the gambling market has slowed down after it outgrew its temporary growth during the pandemic.

To restart its advertising business, Unity merged with ad tech company ironSource in late 2022. That merger boosted its reported revenue by 57% in 2023, but analysts are projecting a 20% decline in 2024, after fully overcoming these inorganic gains and divesting some of its lower-margin core businesses. Also, Unity CEO John Riccitiello abruptly resigned last October after an attempt to launch new “rollover fees” (which would be charged every time a game was installed after a developer exceeded certain revenue thresholds) sparked an intense backlash and called for a boycott among its developers.

Analysts expect Unity’s revenue to actually decline at a CAGR of negative 1% from 2023 and 2026 as it tries to right-size its business. The company is also expected to remain unprofitable on a GAAP basis for the foreseeable future. That’s a bleak outlook, but its stock still looks historically cheap at about four times this year’s sales.

Buy Better: Twilio

I wouldn’t rush to buy either Twilio or Unity right now. Both companies face difficult macro and competitive challenges and are unlikely to attract much interest until they restart their growth engines or reach profitability.

But if I had to choose one, I’d buy Twilio because it’s still growing, it’s cheaper, and it faces fewer existential challenges. Unity’s merger with ironSource clearly hasn’t solved its problems, and I wouldn’t touch it unless its sales growth stabilizes.