I've been cautiously bullish on Twilio (NYSE:TWLO), the cloud services provider that took investors on a nauseating roller-coaster ride after its IPO last June. Despite the high short interest (28% as of this writing) in the stock, I believe that robust demand for its voice, SMS, and video APIs should enable Twilio to keep posting double-digit sales growth for the foreseeable future.

However, I believe that Twilio bulls should also understand the bear case against the stock. Let's examine four common bearish arguments against Twilio, and see if they could throttle the stock's growth.

A glass bull and bear.

Image source: Getty Images.

1. It's a pricey stock

The bears often argue that Twilio is too expensive. Twilio isn't profitable, so it doesn't have a P/E ratio, but it has a P/S ratio of 7.9 -- which is higher than the industry average of 5.6 for application software companies and the S&P 500's average P/S ratio of 2.1.

However, Twilio isn't that expensive compared to cloud-based companies with comparable growth rates. Here's how Twilio's P/S ratio and growth rates compare to two other rapidly growing cloud SaaS (software as a service) players -- Salesforce (NYSE:CRM) and Veeva Systems (NYSE:CRM).

 
Company

Price-to-sales ratio (ttm)

Revenue growth
(last fiscal year)

Revenue growth
(next fiscal year)*

Twilio

7.9

66%

30%

Salesforce

6.8

26%

23%

Veeva

15.3

33%

23%

Data source: Quarterly reports, Morningstar, Financial Times. *Average analyst estimate.

Based on these numbers, Twilio doesn't seem that pricey. We should also remember that Twilio's P/S ratio looks much more reasonable today than it did last August, when it hit the low 20s.

2. It faces fresh competition

Another common argument against Twilio is that new competitors and internally developed products could render its services obsolete. The bears will point out that Twilio's customer Lyft also uses Vonage's Nexmo; that Uber, Twilio's biggest customer, is developing its own internal alternatives to Twilio; and that Facebook (NASDAQ:FB) -- another top Twilio customer -- is pulling WhatsApp from IBM's cloud in favor of in-house hosting.

A visual representation of cloud and mobile connectivity.

Image source: Getty Images.

These developments all indicate that Twilio, which still isn't profitable, could be priced out of the market by bigger competitors. They also indicate that while Twilio's platform might be a good choice for smaller start-ups, bigger companies like Uber and Facebook could find it more cost-effective to host their own APIs for voice, SMS, and video content.

However, the bears often overlook Twilio's strong ties with Amazon (NASDAQ:AMZN). Twilio is hosted on AWS (Amazon Web Services), and Amazon uses its APIs in its Lex chatbots, SNS notifications, Chime enterprise communication service, and Connect cloud-based contact center. Amazon's growing use of Twilio's services is a big vote of confidence for the platform, and indicates that it could be tough for companies like Uber and Facebook to simply create comparable services.

3. It relies too heavily on a few big customers

The bears note that Twilio depends too much on a handful of big customers. The loss of a single customer -- as we saw with its Uber-related crash in early May -- can leave a gaping hole in its top line.

In fiscal 2016, Twilio's ten largest customers generated 30% of its revenue, compared to 32% in 2015 and 25% in 2014. Uber accounted for "more than" 10% of its revenue in 2016, and WhatsApp accounted for 9%.

However, Twilio has been diversifying its customer base with new deals, including a recent one with Morgan Stanley Wealth Management which connects its financial advisors with their clients. So over the long term, Twilio's growth in new active customer accounts (which grew 42% annually last quarter) could gradually reduce the weight of its top customers.

4. Non-existent profits and potential secondary offerings

Lastly, the bears will point out that Twilio is unprofitable by both non-GAAP and GAAP metrics, and that situation won't improve anytime soon. Its cash and equivalents also fell from $305.7 million at the end of 2016 to $118.4 million at the end of the first quarter.

This raises concerns that Twilio could rely on another secondary offering, as it did last October, to generate fresh cash. That move preceded Twilio's big plunge from the high $60s, so it's reasonable to assume that a new secondary offering could cause another big crash.

However, investors should note that Twilio's insider confidence has been rising. Over the past three months, insiders bought six times as many shares as they sold on the open market -- indicating that company insiders are still very bullish on the company's outlook and the stock could finally be bottoming out.

The key takeaways

Twilio is a risky and volatile stock, but the company dominates a niche market with its "best in breed" cloud-based APIs, and it serves some of the world's biggest tech companies.

The challenges facing Twilio are real, but I believe they've been overblown and have caused the company to be unfairly beaten up over the past year. As it's able to overcome these obstacles, the stock could rise and reward investors.

Leo Sun owns shares of Amazon and Twilio. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool recommends Salesforce.com and Twilio. The Motley Fool has a disclosure policy.