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Why Twilio Stock Looks Set for a Bullish Run

By Harsh Chauhan - Feb 25, 2018 at 5:00PM

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The cloud-communications specialist's latest results have sparked a turnaround that looks sustainable.

It looks like 2018 may be Twilio's (TWLO -5.76%) year. Wall Street overlooked the cloud communications specialist's terrific revenue growth last year, because there were concerns about its ability to retain customers. But those concerns were put to rest by the company's fourth-quarter earnings report, which not only beat consensus estimates by a mile but also indicated that its growth is not going to stop anytime soon.

Not surprisingly, investors were extremely satisfied with the results and guidance, sending the stock 20% higher in a single day. More important, Twilio looks well positioned to sustain its newly found momentum, meaning more upside ahead for investors. Let me explain why.

Twilio logo.

Image source: Twilio.

A diversified customer base

The company was negatively impacted by Uber last year as the ridesharing specialist decided to move away from Twilio's communication platform to an in-house solution. But Twilio has put the ghost of Uber behind it -- the ridesharing company contributed just 5% to Twilio's top line during the fourth quarter, down from 12% in the year-ago period.

This means that Uber doesn't have enough clout at Twilio to move the needle substantially anymore. WhatsApp -- owned by Facebook -- is now the company's largest customer with 7% of total revenue. The absence of any 10%-plus customer means that Twilio has made progress reducing its customer concentration.

Its active customer accounts jumped close to 34% year over year during the fourth quarter, helping the company post a 41% increase in revenue despite the drop in contributions from Uber. The company's expanded customer base should boost its revenue by at least 28% this year to $510 million, significantly more than the consensus forecast of $481.4 million.

How the turnaround happened

So, what has Twilio done to bring about this turnaround?

For starters, the company is now focusing on pulling in more revenue from a large number of smaller customers by democratizing its cloud communications platform. This is evident from the rapid growth in customer accounts last quarter. Second, its focus on adding more features at affordable rates is helping it bring more clients into the ecosystem.

For instance, Twilio launched a new platform, known as Studio, last September that allows people with non-technical backgrounds to create software without the help of a developer. As a result, customers can develop workflows using Twilio Studio with less coding, thereby reducing the time to market and boosting the use of its services.

Twilio's scalable cloud-based platform allows customers to add or reduce features according to their requirements. And the company has been adding other features such as artificial intelligence-enabled voice and speech recognition to its cloud platform. This allows Twilio's clients to not only convert speech into text but also gauge a caller's intent to find the important data points mentioned on the call.

Along with real-time transcription, Twilio's speech recognition platform also allows callers to jump directly to the menu they are looking for just by speaking to the interactive voice response system. This saves callers the time that would have been spent on dialing buttons to go to a menu option, while the client organization can attend to more callers and improve customer service.

Additionally, Twilio's customers won't have to pay a fortune to use this feature because, its pay-as-you-go pricing means there are no upfront costs. Users will pay just $0.02 for using the service for a 15-second slot, while bulk purchases will reduce costs further.

Because Twilio's speech recognition platform supports 119 languages, it could gain widespread adoption thanks to affordable pricing, which will help it tap the estimated 20% annual growth in the global voice and speech recognition market through 2023.

Twilio is keeping its products priced attractively and easy to deploy, while giving customers the flexibility to scale them as needed. These strategies should allow Twilio to make a bigger dent in fast-growing markets, setting it up for long-term growth.

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