Twilio (TWLO 0.86%) stock set the market on fire last year, soaring close to 280% on the back of terrific financial growth that outpaced Wall Street's expectations. The cloud communications specialist saw a massive bump in demand for its services quarter after quarter thanks to a huge untapped market, a rapidly growing customer base, and a smart strategy to sustain its impressive sales growth.
In 2019, the stock has already shot up more than 15% as of this writing, and there are many reasons why Twilio's momentum should continue for the rest of the year. Keep reading to learn why Twilio is my top growth stock for 2019.
Twilio is just getting started
Twilio provides internet-based voice, messaging, and video capabilities to customers including Facebook's WhatsApp, Uber, Airbnb, and many others. Its cloud-based platform allows developers to embed communications capabilities into these apps. Every time you call or text your Uber driver from within the app or receive a push notification about your ride arriving, Twilio is working in the background.
Simply put, Twilio acts as a middleman that delivers voice calls, messages, videos, and other relevant content within apps. This is a great business to be in, as companies like Facebook prefer focusing on their core product development and outsource communications tasks to third parties. The growing usage of mobile apps will be the biggest growth driver for Twilio.
Demand for cloud communications platforms is expected to grow at a solid compound annual rate of nearly 22% through 2027, according to Future Market Insights. The research firm estimates that cloud communications will be a $12 billion industry at the end of the forecast period, which is nearly 10 times the $1.4 billion revenue it generated back in 2017. With $561 million in trailing-12-month revenue, it is safe to say that Twilio is just scratching the surface, and has a lot of room to grow its top line both this year and in the long run.
Check out the latest Twilio earnings call transcript.
Moreover, the company has an additional catalyst this year in the form of email marketing. Twilio recently spent $2 billion to acquire SendGrid, which provides cloud-based email marketing solutions. This is another fast-growing vertical: It's expanding at an annual pace of nearly 20%, and is expected to hit $22 billion in revenue by 2025, according to Transparency Market Research.
As such, Twilio looks set to witness faster customer growth and spending in 2019, which will eventually help it move closer toward profitability, and boost investor sentiment as well.
The metrics to watch
Twilio's fast-growing customer base has been critical to its stupendous rise on the stock market. The company's active customer base shot up 31% during the third quarter to 61,150, which led to a 68% annual increase in revenue. So Twilio's revenue grew at a much faster pace than its customer count, which means its clients are buying more of its services.
That's evident from the expansion in Twilio's dollar-based net expansion rate. The company explains that this dollar-based net expansion rate increases when "Active Customer Accounts increase their usage of a product, extend their usage of a product to new applications or adopt a new product." The good part: The metric increased to 145% during the third quarter.
In fact, Twilio's dollar-based net expansion rate has been inching up over the past few quarters along with a jump in its active customer accounts.
Both these metrics should grow at a faster rate this year thanks to the SendGrid acquisition, which gives Twilio access to an additional 40,000 customers. Additionally, Twilio will have the opportunity to cross-sell SendGrid's email marketing solutions to its existing customer base, which will positively affect not only its revenue, but also its profitability.
Twilio is a fast-growing company, so it spends a lot of money on product development and customer acquisition.
However, its operating expenses as a percent of total revenue have started going down in recent quarters, boosting its operating margin in the process. That's one of the reasons why Twilio's adjusted EPS was $0.07 during the third quarter, compared to the prior-year period's loss of $0.08 a share. In fact, Twilio is expected to exit fiscal 2018 with an adjusted EPS of $0.11, compared to the previous fiscal year's loss of $0.19 per share. Analysts estimate that the bottom-line performance will improve further in 2019, with Twilio's adjusted EPS increasing to $0.16.
Twilio is on track to deliver stronger growth in 2019, which is why it is my top growth stock for the year.