Now is your chance to buy Twilio stock at low prices
What determines whether a stock goes up or down? A healthy and growing company will tend to see its stock price increase over the long term, as it creates shareholder value with growing revenues and profits. But in the short term, stock market winds can be a bit unpredictable.
The stock price of a cloud communications company Twilio (NYSE: TWLO) has fallen more than 50% in the past year – and many other growth and technology stocks have suffered similar falls. But despite what this adverse price action might lead you to expect, good things are happening within the Twilio business.
Here are three positives to note and why long-term investors should thank the fickle nature of Wall Street for this buying opportunity.
1. Growth remains strong
Twilio operates a software platform that its customers use to create tools with which they can communicate with their own customers. In this vein, it facilitates in-app and website messaging, programmable text messaging, and more.
The company experienced rapid growth for several years. Revenues grew from $277 million in 2016 to $2.8 billion in 2021, an annualized growth rate of 59% per year. And in 2021, it recorded annual revenue growth of 61%, showing that it still has momentum.
The company now has 256,000 active customer accounts, up from about 221,000 a year ago. Additionally, Twilio maintained a net expansion rate of 130% in dollar terms, reflecting the fact that, on average, the company’s existing customers are spending more and more on the platform.
2. Twilio is just getting started
Buying Twilio stock today would require conviction about the company’s future performance, so while these recent growth numbers are good to see, the more important question for potential investors is what’s next? CEO Jeff Lawson expressed management’s confidence in the company’s outlook during the recent fourth quarter earnings call, referring to its 34% organic revenue growth rate in 2021 and saying it looks expected to reach this figure again in the next few years. Investors should keep in mind, however, that growth can be cyclical, so it can be lumpy at times.
But for a long-term investor, the prospect of Twilio growing organically at a rate of 30%, not to mention the potential for growth through acquisition or other methods, should be attractive. The business growth trail is long in the grand scheme of things. Consider that there are approximately 213 million businesses worldwide, so Twilio’s customer base is just over 0.1% of its potential market.
Even though the company never works with more than a single-digit percentage of global businesses, it has room for many years of continued strong customer growth, and that’s before factoring in increases in expenses that occur once businesses are on board.
3. Profitability on the way?
Twilio’s lack of profitability is something one would understandably be concerned about. Its gross profit in 2021 was $1.4 billion, but because it spends heavily on sales, marketing, and research and development, it posted an operating loss of $915 million. With annual revenue approaching $3 billion, when should investors expect the company to make money?
CFO Khozema Shipchandler spoke about it during this month’s earnings call:
“And I would add that so far we’ve really prioritized growth in scaling the business… But I think we’re now at the point where we have enough scale that we can actually start to reap the benefits of that scale, and just become more efficient in our cloud operations, and so we see a real opportunity for efficiency as we move it around, and we’re really confident in our ability to generate non-GAAP profitability in 2023.”
In other words, the company’s revenue growth is expected to still outpace its expense growth, which could push the company towards profitability over the next couple of years. The product’s adjusted gross margin last quarter was 54.8%, but management has set a long-term goal for this metric to exceed 60%, indicating confidence in its ability to continue growing margins. Investors will want to keep tabs on Twilio’s progress toward that goal.
Caught in a downdraft
Overall, investors seemed to like Twilio’s quarterly report very much, but the market’s broader tech sell-off, high inflation, and the anticipation of higher interest rates that will be rolled out against that inflation have combined to keep shares of Twilio this month near the lowest prices it has traded in the past year. Meanwhile, its valuation is near its lowest in recent years on a price-to-sales basis.
This valuation looks low enough that most of the growth the company generates from here is reflected in the movement of the stock price. Twilio looks like a good deal today, based on its steady run history and the company’s long-term growth opportunities. Buy-and-hold investors should benefit.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.