Twilio (TWLO) is suffering from sluggish price momentum, and recent developments don’t seem promising for its future. Last Thursday, stocks had one of the worst days since 2020. The Dow Jones Industrial Average (DJIA) and the tech-heavy Nasdaq Composite suffered the worst single-day drops in the last two years.
Technology analysts always look for the next big investment opportunities and bring some money-making ideas to their loyal readers. When analyzing this space, the most important thing to remember is that the company should have a wide moat. In addition, if the company is getting support from strong, secular growth tailwinds, then it is the cherry on the cake.
However, the stock itself is struggling. Investors do not want to take any risks at this point. They have their eyes on dividend stocks and retirement-focused equities now. However, that does not mean you should ignore great tech stocks trading at discounted prices.
Twilio experienced a struggling stock market this quarter. Investors just didn’t believe in where the stock market would take them next, and as a result, they sold off across the board and left many to wonder what went wrong with this company.
In the tech landscape, growth stocks are experiencing a steep correction. However, we may be closer to the bottom of the trading range than the top.
Twilio Passes Earnings Hurdle with Flying Colors
With the pandemic’s focus on technology, it was not a surprise that tech companies came out unscathed. The nature of the sector meant it was the likeliest to succeed among all industries. Therefore, regardless of whether the company was doing well, the market rewarded investors.
However, recent months have been tough because of the changing market climate. Now, investors are stricter and set high expectations for unprofitable companies.
Twilio had another excellent quarter, with revenue, earnings per share, and other metrics beating forecasts. The company’s total revenue surpassed $875 million, up 48% from one year ago. The Twilio consensus estimate was $867 million. Twilio reported EPS of $0.00, despite the aggressive loss expectation by Wall Street. Also, due to lower than anticipated expenses and better than expected revenue, the company announced its second consecutive year of positive earnings.
Twilio continues to see big successes overseas as its investments in recent quarters are beginning to make a difference. It expects second-quarter Fiscal 2022 revenue to grow 36-38% over the year-ago period to about $912 to $922 million. Twilio estimates that its revenue for the upcoming year will be about 27% to 29% higher than the previous year on an organic basis. Twilio guided Q2’s operating loss of $35 million to about $45 million.
The company has been committed to generating non-GAAP operating income by 2023. It plans to grow revenues by at least 30%+ over the next year through organic means. The company’s recent outlook indicates that it is very optimistic about its long-term future.
Twilio Will Benefit from the Growth of Mobile Apps
Twilio’s platform has been gaining popularity because people see how well it integrates with the rest of the ecosystem. Developers love it because it offers incredible solutions that are quite effective and stand out from other programming languages on the market. Companies love it because it is easy to deploy and easy to use, meaning the company gets years of growth from its app.
Twilio’s platform handles text messages, voice calls, videos, and other features. The company also provides several add-ons to make apps more powerful. It’s a lot easier for developers to start using Twilio with end-to-end integrations in place, and it saves both time & effort.
Twilio offers a range of services to many companies and non-profits, including phone authentication, chatbot integration, or even partnering with them. Twilio has the potential to benefit from the growth of mobile apps and communications needs in individual applications.
What Are the Risks Involved?
Despite a strong earnings report, which projects an incredible revenue outlook, Twilio’s stock has fallen with the market. The company remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis. The company’s 2018 to 2020 performance was stellar, as it generated significant profits with low investment. However, there was a downward trend when it purchased new businesses and increased spending in 2021.
Twilio’s non-GAAP gross margins have also been under significant pressure. Lower margins, rising costs of wireless access, and less competition mean more consolidation. Twilio’s margins will likely decline over the next five years as it will be too busy spending funds on stock-based compensation expenses.
In addition, the total outstanding share capital of Twilio has increased by more than 2x over the past five years. Despite paying its staff with stock options, the company will continue to grow. However, I believe there is no need to worry about Twilio’s continued dilution.
The stock has been pushed down to a reasonable valuation level, dropping from its high of around 30x annual sales. This means it can still be valued at seven times this year’s sales, even if it continues with the issuance of new shares.
Wall Street’s Take
Sentiment on Wall Street surrounding Twilio is bullish, especially after the recent price correction. Twilio has a Strong Buy consensus rating based on 22 Buys and one Hold. The average Twilio price target is $218.62, which implies upside potential of 136%.
The Bottom Line on TWLO Stock
Twilio has a lot of potential for growth if the company can maintain a target rate of 30% growth over the next five years and improve its gross margins. I believe Twilio will be able to produce multi-bagger gains over the coming two years due to its high-growth trajectory.
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