Twilio Crushes Q4 Expectations, Shares Fall 7% on Modest Bottom-Line Guidance

Cloud-based communications service provider Twilio (TWLO -1.59%) reported fourth-quarter results Wednesday evening. The company beat analyst expectations across the board but expects to post negative earnings for most of the next year. Share prices fell on that seemingly uncomfortable combo.

We'll get back to why that's a mistake in a couple of paragraphs, but let's have a closer look at Twilio's reported results first.

Twilio's fourth-quarter results by the numbers

Data source: Twilio. GAAP = generally accepted accounting principles.

Management's guidance for the fourth quarter pointed to total revenues of roughly $313 million and adjusted earnings near $0.02 per share. The company surpassed both of these targets -- and Wall Street's consensus estimates -- with room to spare.

Twilio served more than 179,000 active customers by the end of the fourth quarter, up from 172,000 in the third quarter and 140,000 in the year-ago report.

Image source: Getty Images.

Going beyond the plain numbers

Looking ahead to the first quarter of fiscal year 2020, Twilio's management expects revenues to increase by roughly 45% year over year, landing near $337 million. The company should record an adjusted net loss of approximately $0.10 per share, down from adjusted profits of $0.05 per share in the same period of fiscal year 2019. The revenue target was set far ahead of Wall Street's $328 million estimates but analysts had been hoping for a modest first-quarter profit of $0.04 per share rather than a loss.

Twilio's operating costs are rising due to a number of ambitious investments. The company is about to open the doors to a new R&D center in India while generally planning to boost its product development budgets throughout 2020. These moves will weigh on Twilio's bottom-line results in the short term but they're intended to improve the company's long-term viability in a brutally competitive market sector. Cloud-based communications services are all the rage right now, including alternatives from massive and deep-pocketed rivals such as Cisco Systems (CSCO -0.52%) and Avaya (AVYA), which forces Twilio to innovate or die. Hence, Twilio's R&D expenses are rising faster than any other category of operating costs.

Would you dare to buy Twilio right now?

Investors focused on Twilio's modest guidance, driving share prices 7% lower on Thursday. But don't cry for Twilio's shareholders -- the stock posted a 27% gain in January alone and now trades at the nosebleed-inducing valuation of 493 times forward earnings or 16 times trailing sales. This is a classic growth stock, evaluated according to its ability to keep posting massive revenue growth even if earnings and cash flow are negative.

Twilio is very good at what it does, and management is not afraid of investing large sums to keep it that way. That's why I expect Twilio's stock to shrug off this modest drop and get back to impressive gains again. Analysts and investors simply need to digest the prospect of Twilio reporting temporarily lower earnings while the company invests in boosting its long-term growth prospects. That's a downright smart strategy.