Shares of communication tool developer Twilio (TWLO) have lost more than 80% of their value from peak to trough. The former pandemic high-flyer has felt more pain than most software plays out there. With the stock now hovering in the 2020 market crash depths of around $87 per share, I do think there’s actual value (and upside) to be had in Twilio despite lacking a price-to-earnings multiple as the tech sector regains its footing.
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At only five times sales, Twilio stock appears cheaper than many low-to-no growth defensives that may have been overshot in the first half. Arguably, the beaten-down speculative tech scene may be where the value now lies. Twilio stock stands out to me as one of the most intriguing names that could be in for a great deal of upside if the tech trade is poised to enjoy a sustained recovery.
In any case, I remain bullish on Twilio at these depths, as the last round of analysts downgrade the stock or lower their price targets in response to the stock’s epic collapse.
Twilio Stock: Still a Leader in Its Corner of the SaaS Space
Twilio is a unique and leading software player in the niche communication-platform-as-a-service (CPaaS) market. The company’s APIs (Application Programming Interfaces) help enterprise firms implement communication features without having to reinvent the wheel. Indeed, the cost savings for Twilio customers are considerable and are a likely driver behind the company’s low churn rates.
Still, the CPaaS industry’s future looks quite hazy. It’s a niche market that may face increasing competition a few years from now as enterprise software giants look to enter new market verticals.
In any case, Twilio remains well-equipped to defend its turf heading into a recession. The company provides services that create value for its customers. Even if IT budgets are in need of trimming in response to macro headwinds, Twilio stands out as far more resilient than most other services that aren’t so critical to day-to-day operations.
Further, Twilio’s willingness to spend money on innovation should help it extend its lead in the communications software market. Although Twilio still has its foot on the growth pedal, the firm aims to become profitable in 2023.
It won’t be easy to break into sustained profitability over the next year. That said, I think management’s shift of focus should have the attention of investors as Twilio CEO Jeff Lawson looks to find the right balance.
Twilio: A Perfect Time to Go Bargain Hunting
It’s hard to ignore Twilio’s M&A moves over the past two years. The company is stepping outside its circle of competence with intriguing acquisitions that could help it enhance the Twilio ecosystem and provide the firm with a means to upsell existing customers.
Last year, Twilio acquired cybersecurity firm Ionic Security and toll-free messager Zipwhip. In late 2020, Twilio acquired data governance tool Segment in a deal worth $3.2 billion.
Undoubtedly, recent deals came at a time when tech firm valuations were somewhat elevated. Still, such deals have bolstered Twilio’s arsenal, and I don’t think the firm overpaid too high a multiple, given the value of the acquired firms was viewed as higher in Twilio’s capable hands.
With tech multiples now in the gutter, one has to think Twilio will increase its pace of acquisitions. The balance sheet remains on steady footing, with over $3 billion in cash and cash equivalents as of the end of the first quarter, leaving ample liquidity to take advantage of opportunities.
Wall Street’s Take on TWLO
Turning to Wall Street, Twilio has a Strong Buy consensus rating based on 18 Buys and five Holds assigned in the past three months. The average TWLO price target of $179.48 implies 99.7% upside potential. Analyst price targets range from a low of $91.00 per share to a high of $320.00 per share.
Takeaway – Twilio Looking to Balance Growth and Profitability
Twilio stock has been tough to hang onto amid the recent slump in unprofitable tech companies. With interest rates on the rise, Twilio is no longer funneling exorbitant amounts into R&D with little consideration for near to medium-term profitability. It’s being more calculated and balanced, which bodes well for the stock’s trajectory in this choppy environment.
While aiming to become profitable next year could slightly decelerate innovation, I do think Twilio is more than capable of making the shift that could help it win back the love of investors.
