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Should You Buy Twilio Stock at Its Current Valuation?

By Harsh Chauhan - Feb 20, 2020 at 9:40AM

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Slowing growth makes this high-valuation cloud communications company seem expensive at the moment, but it could be rewarding in the long run.

It didn't take long for investors to press the panic button after Twilio (TWLO 1.19%) announced that its bottom line will remain deep in the red this fiscal year. Wall Street was expecting a profit of $0.24 per share from the cloud communications specialist, but its latest guidance calls for a loss between $0.20 and $0.14 per share.

Wall Street's expectation of a profit from Twilio doesn't seem out of place considering that the company's top-line growth rate is expected to drop by a big margin this year. At the same time, the stock is currently trading at an expensive 14.7 times sales. This is much higher than last year's average price-to-sales (P/S) ratio of 11.75.

So, does this mean investors should stay away from what seemed like a potential growth stock at the beginning of the year? Let's find out.

Buy, sell, and hold written on three sides of a die, with financial reports and hundred dollar bills in background

Image source: Getty Images.

Taking a closer look at Twilio guidance

Twilio's full-year guidance does look disappointing at first sight. The company expects annual revenue growth of around 31% in fiscal 2020. That would be much lower than the 75% annual revenue growth Twilio reported last year. However, the company's massive top-line spike in 2019 was driven by the acquisition of SendGrid, which Twilio had acquired in early February 2019.

Twilio's organic revenue growth last year stood at 47%. Even then, Twilio's projected revenue growth for fiscal 2020 doesn't look that exciting. But investors shouldn't forget that management has a habit of under-promising and over-delivering. Twilio's original 2019 guidance called for revenue of $1.07 billion (including SendGrid), and the company eventually delivered $1.13 billion.

The company could be adopting a cautious approach in the new fiscal year as it steps up its investment in new product platforms such as Twilio Flex. Launched in 2018, Flex is a fully programmable contact center platform that allows Twilio customers to quickly set up contact centers to handle customer interactions across different channels, including email, social media, chats, and calls.

The platform got a nice shot in the arm when it was launched, with Lyft deciding to deploy Flex to handle its driver and customer interactions. More importantly, the global contact center market has a lot of runway for growth. According to third-party research, the size of the market could double from $17.7 billion in 2018 to over $35 billion by 2023.

Twilio would be doing the right thing by pouring more money into this space in a bid to boost its customer acquisition. The end-market opportunity is huge and Twilio is just scratching the surface, which is why growth-oriented investors should consider giving it enough leeway to take advantage of the same.

Other significant things to watch

There's a lot to like about the way Twilio's business is shaping up. The company exited fiscal 2019 with more than 179,000 active customer accounts, a sharp increase over the 64,286 customer accounts it had in the prior-year period. SendGrid accounted for a major chunk of the new customer additions. This gives Twilio a nice opportunity to cross-sell its services to a new customer base.

What's more, Twilio is able to successfully generate more revenue out of its existing customer base. That's evident from the 131% increase in the company's dollar-based net expansion rate in fiscal 2019 (including the acquisition of SendGrid). This means that Twilio's existing customers spent an additional 31% on its offerings last year.

As Twilio has expanded its capabilities into the email marketing space with the acquisition of SendGrid, it now has more to offer its existing customers. This could lead to a bump in cross-sales in the future, as the global email marketing space is expected to grow at an annual pace of nearly 20% through 2025 to a size of $22 billion, according to Transparency Market Research.

In the end, it can be concluded that Twilio is sitting on multibillion-dollar opportunities, so it makes sense for the company to go all out and grab as much of the market as possible. This would require heavy spending on the company's part, and losses are bound to jump as a result. But at the same time, Twilio did point out that it expects to achieve break-even by the fourth quarter of 2020, indicating that the bottom-line troubles shouldn't last for long.

This is why growth-oriented investors shouldn't lose sleep over the company's guidance, as Twilio's long-term growth trajectory is still intact.

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