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It's Time to Buy This Top Growth Stock

By Harsh Chauhan – May 17, 2019 at 7:00AM

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The company looks all set to step on the gas.

Twilio (TWLO -2.35%) is my top growth stock for 2019, and it has done fairly well on the stock market so far this year, up 48% as of this writing even though Twilio stock dropped after the company on April 30 delivered a solid set of results for the first quarter of 2019. There wasn't a problem with Twilio's outlook, it just seems like some investors decided to book profits. After all, Twilio stock has shot up nearly 400% in the past three years and investors might have thought that now would be a good time to cash in on those gains.

But for more savvy investors, Twilio's post-earnings drop opens up an opportunity to buy more stock, as the company is far from done growing.

Buy, sell, and hold written on three sides of a die.

Image Source: Getty Images.

Twilio's growth will go up a notch thanks to SendGrid

Twilio delivered 81% year-over-year top-line growth in the most recent quarter, hitting $233.1 million, including two months of contribution from SendGrid, the email API platform it acquired.

Twilio's base revenue, which includes revenue from those customers that have inked 12-month minimum contracts, increased a whopping 88% year over year. Excluding SendGrid, Twilio's base revenue was up 60% from the prior-year period. That's impressive organic growth.

As Twilio integrates SendGrid's operations, there are strong indications that investors can expect an impressive increase in revenue and margins. 

Twilio is now sitting on 154,797 active customer accounts, compared to the year-ago quarter's 53,985. SendGrid supplied 84,000 of these new customer accounts, opening up a plethora of cross-selling opportunities for Twilio to profitably grow its business.

In fact, SendGrid is already driving an uptick in Twilio's margins. CFO Khozema Shipchandler said in a conference call with analysts that SendGrid "drove a positive uplift of about 300 basis points," pushing the company's gross margin to just over 58%, compared to 54% in the final quarter of 2018.

SendGrid operates in a fast-growing market, which will help it draw more customers into its fold. According to third-party estimates, the cloud-based email marketing industry that SendGrid serves is growing at a compound annual growth rate of 20%, and could be worth $22 billion in 2025.

So don't be surprised if Twilio's revenue and earnings growth accelerate thanks to the synergies that the $2 billion acquisition of SendGrid brings.

Another important metric to watch

Twilio's dollar-based net expansion rate is another important metric. In Twilio's own words, when active customers "increase their usage of a product, extend their usage of a product to new applications or adopt a new product," the dollar-based net expansion rate goes up. In other words, an increase in this metric indicates that Twilio customers are spending more money on the company's solutions and services.

Last quarter Twilio's dollar-based net expansion rate, which increases when customers use more Twilio products, shot up 146%, outpacing the prior-year period's growth of 132%. The massive jump in this metric excludes SendGrid's impact. This opens up the possibility of further improvements in the dollar-based net expansion rate, as Twilio's cross-selling opportunity will only get better.

Moving toward profitability

Twilio swung to an adjusted profit of $6.4 million last quarter, or $0.05 per share, compared to a loss of $4.1 million in the prior-year period, or $0.04 per share. The company expects to deliver an adjusted net income of $0.12 per share for 2019, which would be a penny higher than the 2018 figure.

But don't be disheartened at this tepid bottom-line forecast, as analyst estimates averaged by Yahoo! Finance are for Twilio to more than double its adjusted earnings to $0.26 per share in 2020. That number looks achievable given the benefits of the SendGrid acquisition.

It makes sense to stick with Twilio for long-term gains. The company's growth won't be slowing down anytime soon, which is why investors should consider taking advantage of the short-term dip to buy shares.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

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