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Here's Why the Best Is Yet to Come for Twilio Inc.

By Rick Munarriz - May 30, 2017 at 9:42AM

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The cloud-based communications specialist has seen its stock decline 24% this month on concerns that its top customers are considering rival offerings. The selloff is an opportunity.

Twilio (TWLO 3.08%) has had a rough month. Shares of the provider of real-time communications solutions for app developers have plummeted 24% in May. Concerns that Uber earlier this month -- and more recently Airbnb -- are turning to cheaper rivals for a larger portion of their in-app needs are weighing on Twilio stock. 

Twilio is clearly out of favor. The stock was a hot debutante when it went public at $15 last summer, peaking at $70.96 a month later. Twilio shares have now surrendered 65% of their value since hitting that all-time high eight months ago. The stock is a few downticks away from hitting fresh lows, but there's an opportunity in the recent sell-off. Let's explore why the best is yet to come for Twilio.

Exterior of a previous Twilio Signal conference for developers.

Image source: Twilio.

Communication breakdown

Twilio stock took a big hit after hosing down its guidance earlier this month. Revenue may have climbed by a better than expected 47% and its adjusted deficit was narrower than the loss that Wall Street pros were targeting, but its outlook wasn't comforting. Twilio lowered its full-year revenue outlook and the forecast it initiated for the current quarter was below Wall Street estimates. 

Twilio blamed its tempered outlook on Uber, its largest customer that has gone from accounting for 17% of its revenue during the fourth quarter of last year to just 12% of Twilio's top-line showing. Twilio warned that Uber will continue to shrink in the overall revenue mix this year, as Uber turns to other solutions in different operating territories to handle its in-app communications. 

The silver lining at the time was that it was just Uber -- a company going through its own growing pains in light of percolating scandals -- as an outlier, but last week an analyst note shed some light on Airbnb's relationship with Twilio. Michael Latimore at Northland spoke to several customers and partners to conclude that Airbnb is using a couple providers for its push notifications as well as for its text-messaging needs. Latimore points out that Airbnb said that it's channeling 80% of its growing volume through Twilio, but the concern is that there are risks here as it tests out options from other likely cheaper providers.

Turning an app-ortunity into an opportunity 

Hearing that two of its largest customers are seeing other people, so to speak, may seem problematic. The midpoint of its guidance for the current quarter suggests its first sequential dip in revenue. Twilio is still not profitable and trades at a high price-to-sales multiple, so it's not as if this month's fresh lows will smoke out value investors.

Thankfully for investors Twilio continues to gain traction across all developers. There are now 40,696 active customer accounts at Twilio, 42% more than a year earlier. Uber and Airbnb still rely on Twilio for the lion's share of their needs, so it's not as if they're going cold turkey. There are no rumblings about WhatsApp -- Twilio's second largest customer -- straying.

Oppenheimer's Ittai Kidron issued a bullish note late last week, coloring the recent sell-off as a buying opportunity. The analyst points out that Twilio has been historically conservative in its guidance, and that he believes Uber will continue to be an important customer. Kidron's $38 price target suggests 52% of upside from last week's close. 

Twilio lowering its full-year outlook may seem to dampen Kidron's point about Twilio's conservative guidance and obviously we'll have to wait and see how Uber plays out. However, with Twilio still growing its business at a healthy double-digit clip it's hard to bet against last year's IPO darling just because it isn't running on all cylinders at the moment. If it can avoid hosing down its guidance again in two months it will take the first big step in winning back the confidence of growth stock investors. 

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