As Twilio (TWLO) stock continues to reach new highs, Vonage (VG) is looking more appealing as it ventures into cloud communications with its acquisition of Nexmo.
But the similarities between the two Communications Platform as a Service (CPaaS) companies surprised Craig-Hallum analyst George Sutton, as he now sees further upside opportunity for VG stock. Vonage shares were up more than 9% Thursday morning, at around $6.25.
Vonage recently acquired Nexmo, which competes directly against Twilio, for $230 million in cash and stock. Nexmo provides a platform that lets people and businesses integrate various forms of communications, like messaging, into their own applications -- just like Twilio. The two companies also have the same revenue model, which means they make money on every transaction.
"From every message sent, every minute of phone traffic, or every authentication that is processed generates revenue for Twilio," said CFO Lee Kirkpatrick during a conference call with analysts this month.
Considering that Nexmo has a similar revenue recognition and an expanding client list, which already includes Alibaba (BABA) , Snapchat and Expedia (EXPE) among others, Craig-Hallum's Sutton adjusted his valuation of the stock.
Sutton increased his price target by $1.50 to $10 as Nexmo appears to look a lot more like Twilio than he expected. The similar growth rates between Nexmo and Twilio surprised Sutton, especially considering the expectations of 40% growth for Nexmo. The cloud communications company posted revenue of $8 million during the previous quarter. While this amount falls well short of Twilio's $64.5 million quarterly revenue (base revenue of $56.4 million), Vonage is expecting revenue to be in the high $80 million range for the full year 2016. Nexmo is also launching its voice application program interface in the third quarter, which other analysts, such as Oppenheimer's Timothy Horan, believe should be superior to Twilio.
Craig-Hallum's Sutton also expects Vonage's accelerated Nexmo investments will close the developer gap with Twilio and accelerate growth further. CEO Alan Masarek said during Vonage's second-quarter conference call with analysts on Aug. 2 that the company is "investing in the acceleration of Nexmo's growth by pulling forward anticipated 2017 investments into this year," in order to fund growth in engineering, sales, marketing and developer relations. CFO Dave Pearson added that the company will be adding $3 million to $5 million in the second half of 2016, money that had been earmarked for 2017.
Sutton reiterated his Buy rating and raised his price target to reflect the "Nexmo opportunity" and believes investors will reward Vonage's valuation.
