Twilio(NYSE: TWLO) and Unity(NYSE: U) both hit their all-time highs during the buying frenzy in growth and meme stocks in 2021. Twilio's stock surged to $443.49 that February, representing a 2,857% gain from its initial public offering (IPO) price of $15 in 2016. Unity's stock hit $201.12 that November, marking a 287% rally from its IPO price of $52 in 2020.
But today, Twilio and Unity trade at about $60 and $15, respectively. Both stocks plummeted as their growth cooled and rising rates popped their bubbly valuations. So should contrarian investors still buy either of these fallen stocks?
Image source: Getty Images.
What happened to Twilio?
Twilio's cloud-based platform processes text messages, voice calls, videos, and other features for mobile apps. Instead of creating 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 features 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 message their drivers; and other companies can send out 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 rose at a robust compound annual growth rate (CAGR) of 55%. That growth was driven by its organic expansion as well as its acquisitions of smaller companies.
But in 2023, Twilio's revenue only increased 9%. Its growth decelerated as the app market matured and the macroheadwinds drove many of its customers to rein in their spending. Twilio also struggled to expand its gross margins as wireless carriers levied higher fees on third-party apps for accessing their networks. The company also remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis.
Twilio was besieged by activist investors as its growth engines sputtered out, and its founder and CEO Jeff Lawson stepped down in early 2024. Analysts expect its revenue to only grow at a CAGR of 7% from 2023 to 2026. Its stock looks cheap at two times this year's sales, but it could struggle to attract a higher valuation in this volatile market.
What happened to Unity?
Unity's freemium game engine bundles 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.
That 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 rose 43% in 2020 and 44% in 2021. But in 2022, its revenue only grew 25% as it faced two major headwinds. First, Apple's (NASDAQ: AAPL) privacy changes on iOS rendered its third-party advertising algorithms obsolete. Second, the gaming market slowed after lapping its temporary growth spurt during the pandemic.
To reboot its advertising business, Unity merged with the ad-tech company ironSource in late 2022. That merger boosted its reported revenue by 57% in 2023, but analysts are bracing for a 20% decline in 2024 after it fully laps those inorganic gains and divests some of its lower-margin, non-core businesses. Unity's CEO John Riccitiello also abruptly resigned last October after an attempt to roll out new "runtime fees" (which would be charged each time a game was installed after a developer surpassed certain revenue thresholds) triggered an intense backlash and calls 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 stay unprofitable on a GAAP basis for the foreseeable future. That's a grim outlook, but its stock still looks historically cheap at about four times this year's sales.
The better buy: Twilio
I wouldn't rush to buy either Twilio and Unity right now. Both companies face tough macro and competitive challenges, and they probably won't attract much interest until they restart their growth engines or achieve profitability.
But if I had to pick 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 didn't solve its problems, and I wouldn't touch it unless its sales growth stabilizes.
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Airbnb, Apple, Twilio, and Unity Software. The Motley Fool has a disclosure policy.
