Twilio (TWLO 2.09%) went public at $15 last June, nearly doubled on its first trading day, and more than doubled again to nearly $70 per share three months later. But then that honeymoon ended, and the stock tumbled all the way back to the high $20s.

Even after that wild roller coaster ride, many investors are still struggling to understand what the cloud service provider actually does and how it's growing. Let's dispel some common misconceptions about Twilio and explain why people are often perplexed by its business.

A smartphone, laptop, and tablet converging on a cutout of a cloud.

Source: Getty.

Misunderstanding its business model

Twilio's cloud platform hosts voice calls, text messages, videos, and other content for apps. To add those services to an app, a developer simply adds some code (called an API, or application program interface) which accesses Twilio's cloud services.

If you call or message an Uber driver via the app, Twilio anonymizes your real number and sends the call through. If you call someone with Facebook's (META 3.51%) WhatsApp and Messenger, Twilio hosts that call. Twilio can also "push" texts, alerts, or notifications onto mobile devices for apps. In the past, developers built these services from scratch -- which could be buggy, costly, and tough to scale.

WhatsApp's mobile app.

WhatsApp's mobile app. Source: Google Play.

Some analysts claim that a bigger cloud company like Amazon (AMZN 1.32%) could simply render Twilio obsolete. Back in March, Global Equities Research analyst Trip Chowdhry claimed that Amazon's new call center product, Amazon Connect, would steal market share from Twilio and force it to lower its prices.

Yet Chowdry missed a lot of key facts. Amazon is actually a Twilio customer, and uses its APIs in its Lex chatbots, SNS notifications, Chime enterprise communication service, and Connect call center. Twilio also runs on AWS (Amazon Web Services), so the two companies would more accurately be described as partners instead of competitors.

Misunderstanding the competitive threats

Nonetheless, claims like Chowdhry's often distract investors from Twilio's true competitive threats. Twilio's only direct competitor is Vonage's (VG) Nexmo, which was widely dismissed as a second-tier player until it became an "alternative" choice for Twilio customer Lyft earlier this year.

The other major threat is that its largest customers, namely Uber and Facebook, will start developing their own in-house replacement platforms for Twilio in their own data centers. Back in May, Twilio's stock plunged after the company disclosed that Uber -- which accounted for 12% of its revenue during the first quarter -- would start replacing Twilio's services with internally developed products.

To counter those threats, Twilio is expanding with acquisitions of smaller companies that bolster its messaging capabilities and diversify its offerings for enterprise customers -- indicating that it wants to evolve into a more diversified cloud services company like Vonage. However, it's unclear if Twilio can leverage its first mover's advantage in cloud communications APIs to become a bigger cloud platform company.

Misunderstanding how it makes money

Some investors might only look at Twilio's revenue as a gauge of its growth. By that measure, its 47% annual sales growth last quarter looks solid. However, investors often overlook two other key figures -- its base revenue and dollar-based net expansion.

A graphical depiction of a cloud.

Source: Getty.

Twilio's base revenue measure excludes revenue from big customer accounts (like WhatsApp) that didn't sign 12-month minimum revenue commitment contracts. That figure, which essentially measures its growth among "regular" customers, rose 62% annually last quarter and accounted for 92% of its revenue.

Twilio's dollar-based net revenue measures its growth in revenue (based on usage or new products) per customer. That figure, which shows how much more revenue Twilio is squeezing out from each customer, rose 141% last quarter.

But despite those positive top line numbers, Twilio remains unprofitable by both GAAP and non-GAAP metrics. That's deeply troubling when we consider that Twilio already serves billions of end users across WhatsApp, Messenger, Uber, and other popular services. If it can't squeeze out a profit with that many end users, will it ever break even?

Mixed signals from management

When a company's growth prospects seem as uncertain as Twilio's, investors often check insider transactions to see how management feels. But over the past 12 months, insiders bought 22.4 million shares and sold 21.3 million.

Therefore, insiders seem slightly more bullish than bearish, but that gap isn't wide enough to proclaim that insiders are actually confident in Twilio's long-term prospects.

The valuations don't help much, either...

High growth cloud-based companies are tough to measure with traditional valuations, and Twilio is no different. It trades at 8.6 times sales, which is higher than the industry average of 5.6 for application software makers.

But that's not much more expensive than high-growth cloud stocks like Salesforce, which trades at 7 times sales. Therefore, the valuations don't give us a clear picture of Twilio's prospects.

The confusion conclusion

Twilio faces tough competition ahead, but it's trying to expand to counter those threats. Investors and insiders seem equally unsure if those efforts will work (or if it will ever break even), and the valuations suggest that it's "fairly" priced for a high-growth cloud company. That's why no one really seems to know what to make of Twilio, which remains a young company with plenty to prove.