On January 13th, Morgan Stanley analysts released a number of ratings for software stack companies in the communications software sector. This provided an update on opportunities for 2020. These highlighted continued strength in Twilio (TWLO), which we regard favorably.

Specifically, Morgan Stanley analysts provided the following ratings and price targets:

  • EGHT: Lowered to equal-weight from overweight. Price target reduced from $28 to $23.
  • VG: Maintained equal-weight. Price target lowered from $12 to $9.
  • AVYA: Maintained equal-weight. Price target lowered from $16 to $15.
  • RNG, FIVN, ZM: Maintained equal-weight, but also maintained price targets. Morgan Stanley feels these companies will benefit from momentum and investor interest, but thinks upside is already reflected in the stock price.

Overall, these companies are focused on providing solutions focused on the call center (except ZM), with other communications services branching out of that. Vonage does include the Nexmo offering, which is a competitor to Twilio in messaging/voice/auth API services.

On the other communications API providers, Morgan Stanley provided updates on Twilio (TWLO) and Bandwidth (BAND).

  • TWLO: Maintained outperform rating. Price target raised from $135 to $140. Current price of $119.
  • BAND: Maintained equal-weight rating. Price target raised to $67. Current price of $70.

Morgan Stanley analysts spoke most highly of Twilio in their report, and it remains their top pick in the CPaaS sector.

The firm said Twilio, which is the only stock in communication software that Morgan Stanley continues to rate at outperform, remains its top pick in the sector. Its overweight thesis on the stock “is centered around the idea that TWLO should continue to be a share gainer in a CPaaS [communications platform as a service] market growing [at about] 30%,” the firm said.

It added: “While CPaaS market is competitive, we believe that for organizations truly trying to transform communication (e.g. not single use case), TWLO represents the best platform for these services, giving the company a meaningful growth tail.”

morgan Stanley CPaas Update, Jan 13, 2020

For Bandwidth, the analyst expects it “to rise into Q4 results and Q1 guidance given the new strategic accounts expected to be onboarded by then.” In its Q3 quarterly report, BAND had lowered its Q4 guidance, citing several customer accounts that were taking longer to close than expected. This should provide anticipated upside to Q4 results and Q1 guidance. However, after Q1, the analyst is more cautious on upside potential for BAND, benefiting from smaller customer wins and pursuit of international expansion.

This all continues to bode well for Twilio (TWLO) and our investment thesis appears to be intact for 2020. Twilio will benefit from rapid CPaaS market growth, in which Twilio is gaining share. Additionally, its expanding product offering, beyond single use cases or add-ons with limited functionality, should continue to make the argument to customers for engaging with a “platform” approach to communications services. Finally, of all these companies, Twilio has the strongest developer outreach and evangelism.