What happened
Shares of Twilio (TWLO 2.92%) fell 12.2% in October 2019, according to data from S&P Global Market Intelligence. The provider of business software platforms had a very bad day right after reporting strong third-quarter results, with a side order of weak next-quarter guidance. The stock fell as much as 13.8% in intraday trading that day.
So what
Twilio's earnings fell from $0.07 to $0.03 per share, still exceeding the Street's consensus estimate at $0.01 per share. Revenue rose 75% to $295 million, also ahead of analysts' projections of $288 million.
Management guided fourth-quarter earnings to approximately $0.02 per share alongside a sales target of roughly $313 million. Here, the Street consensus had been pointing to earnings near $0.07 per share of revenue in the vicinity of $322 million. That market's retribution for these forward-looking misses was swift and brutal.
Image source: Getty Images.
Now what
The steep discount that was applied to Twilio's shares in October was almost certainly a mistake. Earnings guidance came in low for the fourth quarter because management isn't attempting to maximize bottom-line profit at this stage in Twilio's development. Pretty much every spare penny is reinvested into research and development, marketing, and other strategies driving future business growth. I don't have a problem with that plan, which is commonly found in young companies chasing extreme revenue growth in the short to medium term.
As for the disappointing revenue forecast for the end of 2019, Twilio's management admitted that it's simply being very conservative. The company experienced errors in a few invoices during the third quarter, tied to mistakes when entering orders into the billing system. That issue will reduce Twilio's fourth-quarter top line by a few million dollars, reflecting the refunds that were issued to correct the issue.
"I think we feel like we've got a good handle on the issues, and we're certainly actively working to correct them," said CFO Khozema Shipchandler in the earnings call. "But I think we felt it was warranted to put it in a little bit of an extra buffer until we're absolutely certain that all the issues are addressed. And we're not necessarily quantifying that, but I think we felt like it was prudent to do so as we work through the fixes that are entailed with that."
Fellow Fool Nicholas Rossolillo thinks it's time to buy Twilio under these circumstances, since the third-quarter report really didn't support an immediate discount of more than 13%. He's not wrong, you know.
