KEY POINTS

  • For the time being, Twilio expects to continue growing organically at a rate of 30% or more.
  • Next year, Twilio should be able to start generating an adjusted profit.
  • This firm appears to have a lot of money, given its size.

Twilio (NYSE:TWLO) has been an awful investment over the last year, but is Twilio a buy now? The current bear market has exacted a significant toll on many firms. But, Twilio has taken a beating especially hard and is down 81% from its all-time highs.

However, the past year does not tell the whole story. Twilio has continued to outperform the market since its summer 2016 IPO. Even after a sharp decline, Twilio stock has increased 210%. That’s compared to a total return of 192% for the Nasdaq 100 (^NDX) and 110% for the S&P 500 (^GSPC) over that same period. If Twilio can maintain its growth and begin generating meaningful earnings in the next few years, this stock has the potential to rise even higher.

What does Twilio do?

Cloud computing has been a mainstay in IT departments worldwide for the past decade. During the pandemic, it was tested early on and proved to be a lifesaver for many people and organizations. The cloud provides operational flexibility while also saving money. In 2020, Zoom Video Communications (NASDAQ:ZM) became an overnight household name. The firm went from being an obscure subscription-software company to being commonplace almost overnight due to Covid-19.

Twilio was another cloud communication solution that thrived early in the pandemic. However, while Zoom’s primary objective is to provide a ready-to-use product, Twilio’s business model is built on software building blocks (known as APIs) that allow developers to integrate communications capabilities into their apps or websites. These functions include text messaging, instant chat, email, voice, or video calls.

Twilio has also been developing ready-to-use solutions, such as Flex. Flex is a cloud-based contact center solution that combines numerous customer communications functions into one platform. Twilio’s most recent endeavor is its use of its acquisition of Segment to develop customer data analytics.

Can Twilio be a serious market-beater

Zoom and Twilio have both seen slowing growth rates as the early effects of the pandemic wear off. However, while Zoom’s growth has slowed to a near-pedestrian pace (up only 12% YOY in the first quarter), Twilio has continued moving fast.

Twilio’s revenue increased 35% year over year in the first quarter of 2022, continuing a two-year growth streak. That’s down from the 53% organic increase in full-year 2020 and 42% growth in full-year 2021. However, co-founder and CEO Jeff Lawson is confident that Twilio will continue to see at least 30% organic growth for the foreseeable future.

Twilio has not generated a profit to date. This is primarily why Twilio’s stock has taken a beating. Inflation and rising interest rates result in the market punishing high-growth stocks that operate in the red. These losses are by design, as Lawson and company see significant opportunity for expansion (and thus need to spend loads of money on marketing and development). Still, Twilio should be able to achieve adjusted operating profitability in 2023.

Is Twilio a buy?

Twilio could surge in price if it does, at some point, turn a profit. The stock currently sells for just 4.4 times expected sales for the current year. Twilio is well positioned to keep accelerating while shareholders wait for profits. Cash and short-term investments were $5.2 billion at the end of March 2022, while debt was only $986 million. Those are considerable funds for a business with an enterprise value of $12 billion. With this cash flow, Twilio can spend heavily on marketing and makes further bolt-on communication software purchases if it so desires.

Twilio should benefit significantly from the cloud’s anticipated decade of rapid adoption in business. Additionally, Twilio should be a significant beneficiary because it assists companies in modernizing their communication infrastructure. Finally, Twilio’s sales are growing steadily, and profitability is possible as a second tailwind that might propel the company higher. Unfortunately, the stock has not included this second tailwind in the stock price. As a result, the share price is likely to be highly volatile. However, now that Twilio plummetted in the first half of 2022, it appears to be a fantastic long-term buy.

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