Twilio (TWLO) stock has gone from strength to strength recently, announcing all sorts of interesting revelations while racking up more than 97% in share price gains since November last year.
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The company will report its latest earnings results on February 13. However, a preliminary report published last week suggests Twilio has streamlined costs and enhanced its growth trajectory while successfully embedding artificial intelligence (AI) into its product suite.
Despite the harp music and a rosy background pushing TWLO to new highs, I’m turning Neutral on the stock, with my prior bullishness on hold while I digest TWLO’s moves and newly-elevated valuation.
Investor Days from Heaven
Twilio’s stock surged following its recent Investor Day, where the company unveiled promising preliminary Q4 results and an ambitious long-term operating model. Under CEO Khozema Shipchandler’s leadership, Twilio has successfully streamlined costs and stabilized growth, delivering non-GAAP operating profitability and improved free cash flow.
Looking ahead, management expects the cloud communicator to achieve double-digit growth from 2026 onwards, targeting a non-GAAP operating margin of 21-22% by 2027 and cumulative free cash flow exceeding $3 billion. To do this, Twilio is betting the house on AI to drive growth in two prime markets.
The company is pushing into the Communications and Data market, set to be worth $119 billion by 2027, by developing innovative AI-powered products that help businesses interact more effectively with customers. As its second target market, Twilio is pursuing the rapidly emerging Customer Experience as a Service (CXaaS) market, which could add another $39 billion to its total addressable market (TAM) opportunity by 2027. By strategically investing in AI technologies, Twilio aims to transform how companies communicate, personalize interactions, and deliver value to their customers.
Moreover, the company is well-positioned to capitalize on this growth in key markets, with over 9,000 AI companies, including 90% of Forbes 50 AI Startups, utilizing Twilio’s services. Moreover, the company’s focus on cross-selling is expected to increase customer spending through broader product adoption, further driving growth and cementing Twilio’s market position.
In short, TWLO management’s comments on Investor Day reinforced the improvement in investor sentiment in recent months. The company’s revenue growth has accelerated in Q3 2024, bolstering investor confidence, which has waned recently.
AI Success Ends Underperformance
In relatively recent news that sprung a surprise on the market, Twilio has effectively embedded AI and machine learning capabilities across its product suite, including Verify, SMS Pumping Protection, Engagement Suite, and Voice Intelligence. These AI-driven solutions have enabled Twilio’s customers to enhance user engagement and personalization, resulting in higher ROI.
One key development is the integration with OpenAI’s real-time API. This feature strengthens its position in the AI era by allowing customers and developers to create targeted conversational virtual agents. This strategic move aligns with customers’ demand for AI-powered customer interactions, potentially allowing them to achieve greater productivity with fewer staff.
Is Twilio’s Valuation Stretched?
The DeepSeek saga has reminded us that we should be wary of stretched valuations, and Twilio’s valuation appears to be stretching, with a current price-to-earnings (P/E) ratio of 37x for 2024 — a 41% premium to the IT sector. While projections show a decreasing trend, reaching 23.6x by 2027, these figures still indicate a premium valuation.
To further corroborate the overstretching, TWLO’s price-to-sales (P/S) ratio of 5.5x and forward P/S of 4.8x are significantly higher than current industry averages. However, its price-to-book ratios (2.6x TTM and 2.8x FWD) are lower than those of its peers, suggesting potential undervaluation.
However, as it stands, earnings are expected to grow fastest in 2024 (at 50.4%) before slowing to 15.3% in 2027. There could also be further upside to these forecasts as analysts continue digesting TWLO’s investor day news bonanza. Twilio doesn’t offer a dividend, which is typical for growth-oriented tech companies.
What Do the Hedge Funds Think?
Despite its headline-grabbing exploits, the smart institutional money doesn’t seem to like Twilio.
According to TipRanks’ hedge funds tracker, TWLO is currently seen with low confidence by hedge fund managers on Wall Street. According to 13F filings from 486 hedge funds submitted to the U.S. SEC throughout 2024, as TWLO has seen higher highs, hedge fund managers have reduced their stakes from around 17.5 million shares in January 2024 to around 10 million today. The current Confidence Signal based on 16 leading hedge funds is Very Negative.
Is Twilio a Buy or Sell Stock?
On Wall Street, TWLO carries a Moderate Buy rating based on 16 Buy, six Hold, and two Sell ratings assigned by analysts over the past three months. The average TWLO stock price target is $133.35 per share, implying about 4% downside potential.
Improved Fortunes Carry Lofty Price Tag
I’m Neutral on Twilio stock for the time being despite the company taking significant strides in AI innovation and improving profitability. Yes, TWLO’s ambitious growth targets underscore its strong potential, and yes, AI is the next best thing since the Internet. However, TWLO’s valuation metrics are making me pause for reflection.
Up 26% in one month, upon further inspection, the company’s valuation now seems rather lofty, with potentially unrealistic expectations regarding future performance. Maybe, just maybe, TWLO has bitten off more than it can chew. I don’t believe TWLO’s risk-reward profile has been fully reflected in analysts’ forecasts.
While management’s plans to capture a larger share of the $158 billion combined TAM are impressive, the premium valuation may limit near-term upside. Twilio remains a compelling long-term story, but current market conditions and valuation risks warrant a wait-and-see stance, at least until TWLO provides further clarity in its next earnings release in February.
