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Better Buy: Twilio vs. Unity Software

While Twilio (NYSE: TWLO) and Unity Software (NYSE: U) operate in different corners of the software services market, each of these tech companies is poised to benefit from powerful trends. Growth-focused investors might be wondering which stock is the better buy. Read on to see where two Motley Fool contributors come down on the debate.

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Twilio leads the customer-engagement revolution

Josh Kohn-Lindquist: Intent to grow beyond the cloud-based communications platform it is known for, Twilio recently updated its mission; it now aims to "unlock the imagination of builders." That's changed from its previous mission to "fuel the future of communications." And this new statement highlights management's focus on the broader customer-engagement experience, of which communications are only a portion.

While seemingly daunting, this new goal does a better job of expressing the tremendous growth options that an investment in Twilio provides. 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 offers companies access to pivotal interactions with its customers in real time.

Furthermore, thanks to the economic restrictions put in place by COVID-19, these solutions quickly became a must-have for many of Twilio's customers. Take Nike, for example. Due to the pandemic, the company closed its physical stores and shifted all its sales to digital. Thanks to Twilio Flex, Nike connected its existing sales staff with customers across all digital channels, allowing the company to maintain profitability in unprecedented times.

Riding this megatrend of using customer data for more-imaginative engagement, Twilio has posted four consecutive quarters with year-over-year revenue growth above 60%. Furthermore, the company has maintained a dollar-based net expansion rate above 130% for the last seven quarters, highlighting increased spending from existing customers year to year.

Trading with a market capitalization of about $49 billion and at 38 times its gross profit, Twilio will undoubtedly be considered expensive to many investors. However, with its broadened mission and its unique focus on customer data and engagement, Twilio is poised to potentially become one of the most influential companies of our time, making today's prices very intriguing over the long term.

Unity Software will power the interactive-content revolution

Keith Noonan: While Twilio likely still has a long runway for growth, I think Unity Software is even better positioned to deliver wins for 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 just gaming.

Unity provides an efficient, go-to engine for individuals and businesses looking to create all manner of interactive content. If you're following the technology space, there's a good chance that you've been hearing a lot about the metaverse lately. The term "metaverse" is still relatively new, but it's basically shorthand for virtual worlds. And many of the world's biggest companies are eyeing this emerging medium as a potentially massive growth driver.

Incredible levels of engagement set video games apart from other entertainment mediums, and it's not surprising that small developers and massive companies alike are seeing huge promise in making their content and services more interactive. Companies stand to see huge windfalls if they manage to create shopping or brand-building experiences around gamified setups in virtual worlds.

Unity is making it easy for its customers to capitalize on these trends and build experiences that can bring audiences in, and keep them engaged. The business has been growing at a stellar clip, with sales up roughly 43% in the third quarter, and it looks like the software engine specialist still has enormous room for growth.

With the company having a market cap of roughly $54 billion and valued at approximately 50 times this year's expected sales, it's fair to say some strong performance is already priced in, but I think the passage of time will show that Unity was actually quite cheap at current prices.

Which stock is right for you?

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

It's worth noting that Twilio trades at smaller sales multiples, so growth investors seeking a lower risk profile might find its stock to be a better fit. Otherwise, deciding which stock is best for your portfolio may come down to which industry you see more promise in.

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Josh Kohn-Lindquist owns shares of Twilio and Unity Software Inc. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Twilio, and Unity Software Inc. The Motley Fool has a disclosure policy.


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