FOCUS
S&P 500 TECH SECTOR
AVERAGE API COMPANIES
AMAZON
ATLASSIAN
OKTA
ADYEN
TWILIO 256.2%
165.8
120.0
98.0
8.4
84.7
4.3
PRICE CHANGES SINCE MARCH 1, 2018
SOURCE: BLOOMBERG
40
FORTUNE.COM // APR.1.19
providers are likely to enjoy “network effects,”
becoming the dominant, go-to choices in their
categories. Because API providers cater to
developers, they’re able to build followings
inside and across organizations of all sizes,
with negligible marketing costs and powerful
economies of scale. And as their APIs get used
more, the providers will get paid more.
“People often call us plumbers,” says Sima
Gandhi, who heads business development and
strategy at Plaid, which uses APIs to connect
bank accounts to fintech applications such as
payments app Venmo and investment broker-
tions APIs—linkages that help businesses contact customers through
text messages and phone calls. It’s a steadily growing category, and
Twilio’s stock more than tripled over the past year as the product
took off. For those seeking to invest in the communications API
trend at a lower valuation, Patrick Walravens, an analyst at JMP
Securities, recommends Bandwidth (BAND, $56), a telecom concern
whose business fundamentals are “not particularly well understood
yet” by the market. Twilio trades at a multiple of around 18 times last
year’s revenue of $650 million; Bandwidth trades at just five times
its $204 million in revenue.
APIs are also making an impact in payment processing, where
they help connect merchants, banks, and consumers. The most
mature API player in this market is Stripe, which is privately
collaborate on coding. (As Twilio’s Lawson puts it: If your coders ran
a cookie factory, Atlassian would supply the baking sheets.) Its fan
base is growing; in its 2018 fiscal year, revenue rose 41% over the
year prior, to $874 million, and it has plenty of room to expand in
the $20 billion–plus market for IT operations and service.
Small and new as they are, these API-first businesses are rela-
tively speculative bets. But Byron Deeter, an investor at Bessemer
Venture Partners and an early backer of both Twilio and SendGrid,
an API-focused email business that Twilio recently acquired, be-
lieves their turbocharged business models are only now coming to
fruition. “You’re going to see a lot more of these companies in the
public markets in the years ahead,” he says.
age Robinhood. The startup claims to have
hooks in one out of four bank accounts in the
U.S., despite most consumers never having
heard of it. “We do the dirty work,” Gandhi says.
BECAUSE THE API TREND is so new, most of the
action remains in the private markets. But a
growing field of publicly traded companies
offers options for savvy investors.
Twilio (TWLO, $122), whose CEO, Jeff Law-
son, is a veteran of Amazon’s cloud business,
derives most of its revenue from communica-
held. But public-market investors can get
exposure to a fast follower, Adyen (ADYEN, $746),
a Netherlands-based payment processor that
brought in $1.95 billion last fiscal year and
counts Uber and Spotify among its customers.
Another up-and-comer is Okta (OKTA, $85),
which sells “identity management” tech that
eliminates the hassle of passwords. The company
originally sold identity products for use just in
the workplace, says Todd McKinnon, Okta’s
CEO, but soon found its corporate customers
clamoring for a way to verify the identities of
their customers—a market McKinnon believes
could grow to be bigger than the workplace one.
In addition to the initial product, Okta now
sells a customer-focused, API-powered product
to companies ranging from Adobe to MGM
Resorts. The company’s share price has zoomed
more than 260% since its 2017 IPO, but JMP’s
Walravens recently wrote that its valuation “fairly
captures the company’s impressive growth.”
Atlassian (TEAM, $107), an Australian outfit, spe-
cializes not in providing APIs but rather in offer-
ing developers the tools they need to work with
the APIs other companies supply. Its Jira product,
for instance, helps coders and project managers
track software progress, bugs, and other issues,
while its Confluence tool enables developers to
INVEST
RAPIDLY UNFOLDING DEVELOPMENT
Companies that focus on making APIs—connective compo-
nents for software developers—have produced blockbuster
returns recently. And API services have also boosted the
results of bigger tech companies like PayPal and Amazon.
“AVERAGE” GROUP IS A BASKE T OF 12 API-REL ATED STOCKS, INCLUDING SENDGRID,
WHICH WAS ACQUIRED BY T WILIO FEB. 1, AS WELL AS DROPBOX, DOCUSIGN, AND
ADYEN, WHICH E ACH WENT PUBLIC LESS THAN 12 MONTHS AGO.
GRAPHIC BY NICOLAS RAPP
