Twilio (TWLO) is among the hottest stocks in this market. But it is not the only game in town when it comes a cloud computing platform that can integrate text with other offerings.
There's another smaller, company that is growing quickly that you probably never heard of because, improbably, it's owned by a real down-and-out company: Vonage (VG) . Nexmo, which Vonage bought for $230 million in cash and stock, may end up being the son of Twilio.
Vonage has been around since the end of the dot-com bubble, best known for providing business and residential telecommunication services. You might remember commercials featuring a talking ear and mouth or another in which Vonage "Betterfied" your home phone service.
But now it is moving toward cloud communication services with its acquisition of Nexmo, the second-largest Communications Platform as a Service ("CPaaS") company in the world. Essentially, Nexmo provides communication application program interfaces (API) to let other people and businesses integrate various forms of communications, such as messaging, into their own applications.
This means that Nexmo competes directly against the industry leader, Twilio.
Twilio went public earlier this year. It offered 10 million shares at $15 per share, valuing Twilio at about $1.2 billion before its market debut. Shares nearly doubled on the first day of trading and it hit an all-time high Friday at $51, valuing the company at a staggering $4.3 billion. TWLO closed Friday up more than 9% at $53.29.
Following its first earnings report, Jim Cramer said that, in a word, Twilio is "terrific." He was wowed by the company's business model, which CFO Lee Kirkpatrick described on the conference call with analysts. "Every message sent, every minute of phone traffic, or every authentication that is processed generates revenues for Twilio," Kirkpatrick said.
"I love their unique model where they partner with their clients and take a piece of all the money that their clients receive using their tech," Cramer said.
Real Money reached out to several clients about their choice in using Twilio vs. Nexmo and vice versa. Amazon did not have an official comment and salesforce.com responded by saying they do not disclose specifics on why they chose one vendor over another.
Nexmo also has the same exact usage-based business model as Twilio. William Blair analyst Dmitry Netis told Real Money during a phone interview Friday that Nexmo makes money based on the number of text messages, SMS or number of minutes connected -- taking a piece of every transaction.
But Nexmo might have an advantage over Twilio.
Oppenheimer analyst Timothy Horan noted that with the launch of the voice API product in the third quarter, "Nexmo's product suite can challenge the dominance of Twilio in voice." He even says that the voice service should be superior to Twilio. In an Aug. 2 research note, Horan added that pairing Nexmo's voice API with Vonage's network will allow for a "higher quality product at a third of competitor costs due to VG's direct peering relationships with global carriers." The analyst also mentioned that Nexmo's messaging API is on par with Twilio's. He gave the stock an Outperform rating.
Already Vonage has seen an impact on its income statement from the $230 million acquisition. Nexmo is responsible for $8 million in revenue in the second quarter, which is only about a 10th of Vonage's enterprise revenue of $86 million. The company reported total revenue of $234 million for the quarter. The company also said on an Aug. 2 earnings call that Nexmo revenue is projected to be in the high $80 million range for the full year 2016.
But Nexmo's quarterly revenues were well below Twilio's total quarterly revenue of $64.5 million (base revenue of $56.4 million).
Still, Oppenheimer's Horan believes that the Nexmo acquisition can create $200 million to $500 million in value in the next three years, "provided Vonage can execute on its strategy of both improving product capabilities and increasing developer awareness." While that is a big "if," the firm raised its price target to $7 to account for the "transformative potential" of Nexmo. VG closed Friday down slightly at $5.61.
William Blair's Netis wrote on Aug. 3 that he believes the Nexmo investment will accelerate growth for Vonage. Netis said he believes that Nexmo can grow above 40% in 2017 (he is modeling $125 million) by focusing on developer awareness, lead generation, and enterprise footprint, among other things. He also gave Vonage an Outperform rating.
Vonage's move to cloud communications should not come as a surprise. According to an August 2016 investor presentation, cloud communications is rapidly growing, driven by Unified Communication as a Service ("UCaaS") and increasing CPaaS delivery models. (UCaaS refers to a service model where providers deliver telecom or communications software applications or services [think Nexmo], usually through the Web). Both UCaaS and CPaaS were once viewed as separate industries, but they have been merging recently.
Vonage also notes in its presentation that CPaaS today is much like UCaaS in 2012, worth more than $1 billion. But by 2018, CPaaS is projected to be comparable in size to UCaaS today, which is worth about $9 billion.
"With the addition of Nexmo, Vonage will have a total addressable market of nearly $28 billion by 2018," the company said in a statement.
With Nexmo in the portfolio, analysts believe Vonage is ready to grow.
"Applying the same multiple that pure-play Twilio trades at to Nexmo is not entirely fair -- considering Twilio's faster growth profile, better margins, more complete set of API products, and first-mover advantage -- but we see no reason Nexmo cannot trade at a 4x to 5x revenue multiple given the current state of affairs," Netis wrote in a June 24 research note. At 4x 2017 revenue of $125 million, Nexmo is worth about $500 million, double what Vonage paid for it, Netis noted.
"If [Nexmo] had 4x the Twilio multiple, it would put Vonage stock in the $9 to $10 range," Netis said Friday.
Considering the push to take services to the cloud, Nexmo could see numbers like Twilio's, and Vonage could be back in the "business of better."