Better buy: Twilio vs Unity Software

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While Twilio (NYSE: TWLO) and Unity software (NYSE: U) operate in different sectors of the software services market, each of these technology companies is poised to benefit from powerful trends. Growth investors might wonder which stock is the best buy. Read on to see where two Motley Fool contributors take to the debate.

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Twilio leads the customer engagement revolution

Josh Kohn-Lindquist: With the intention of expanding beyond the cloud-based communications platform it is known for, Twilio recently updated its mission; it now aims to “free the imagination of builders”. This has changed from its previous mission of “fueling the future of communications”. And this new statement highlights management’s focus on the broader customer engagement experience, of which communications are only a part.

While seemingly daunting, this new focus better expresses the tremendous growth options that an investment in Twilio offers. As customer engagement becomes paramount in today’s increasingly digital world, with its rapidly growing Direct-to-Consumer (D2C) sales, Twilio’s suite of customizable solutions provides businesses with access to interactions crucial with its customers in real time.

In addition, thanks to the economic restrictions put in place by COVID-19, these solutions have quickly become essential for many Twilio customers. Take Nike, for example. Due to the pandemic, the company has closed its physical stores and shifted all of its sales to digital. Through Twilio Flex, Nike connected its existing sales staff to customers across all digital channels, helping the company to maintain profitability in an unprecedented time.

Riding this megatrend of using customer data for more imaginative engagement, Twilio has had four consecutive quarters with year-over-year revenue growth exceeding 60%. In addition, the company has maintained a net dollar expansion rate of over 130% over the past seven quarters, highlighting the increase in spending by existing customers year over year.

Trading with a market cap of around $ 49 billion and at 38 times its gross margin, Twilio will no doubt be seen as expensive for many investors. However, with its expanded mission and unique focus on data and customer engagement, Twilio is poised to become one of the most influential companies of our time, making current pricing very intriguing in the long run.

Unity Software will propel the interactive content revolution

Keith Noonan: While Twilio probably still has a long avenue for growth, I believe Unity Software is even better positioned to deliver gains to investors. Unity is best known for providing a development engine for the creation of video games, but the company’s growth opportunities extend far beyond games.

Unity provides an efficient and essential engine for individuals and businesses looking to create all kinds of interactive content. If you’re following the tech space, there’s a good chance you’ve heard a lot about the Metaverse lately. The term “metaverse” is still relatively new, but it’s basically a shorthand for virtual worlds. And many of the world’s largest companies see this emerging medium as a potentially massive growth engine.

Incredible levels of engagement set video games apart from other entertainment mediums, and it’s no surprise that small developers and large businesses see huge promise in making their content and services more interactive. Businesses should see huge bargains if they can successfully create buying or branding experiences around gamified setups in virtual worlds.

Unity makes it easy for its customers to capitalize on these trends and create experiences that can attract and retain audiences. The company has grown by leaps and bounds, with sales up around 43% in the third quarter, and it looks like the software engine specialist still has huge room for growth.

With a market cap of around $ 54 billion and worth around 50 times the expected sales this year, it’s fair to say that strong performance is already expected, but I think the passage of time will show that Unity was actually quite cheap at current prices.

What action is right for you?

Investors who see promise in communications and interactive content technology services may want to buy both Twilio and Unity. Both companies are category leaders in their respective industries, and are poised to benefit from strong tailwinds in long-term demand.

It should be noted that Twilio trades at lower sell multiples, so growth investors looking for a lower risk profile might find its stock more suited. Otherwise, deciding which stock is best for your portfolio may depend on which industry you see the most promise in.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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