Twilio (TWLO 1.74%) started off the year on a solid note, racking up impressive share-price gains in the first few weeks of 2020. The cloud communications specialist looked destined for a strong year thanks to some solid catalysts. Acquisitions, a rapidly growing customer base, and its presence in lucrative markets were supposed to be tailwinds for the stock.
Then the novel coronavirus pandemic threw a spanner into the works. But the good thing is that investors looking for a long-term cloud play can now buy Twilio at a reasonable valuation.
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Twilio appears to be a bargain right now
Twilio stock was trading at expensive valuations less than two months ago, but it's not anymore. Its price-to-sales (P/S) ratio is now at 9.2, lower than 2019's average of 11.75 and the 2018 average of over 15.
TWLO PS Ratio data by YCharts
Part of the reason why Twilio is trading at such cheap levels right now is the modest bottom-line guidance that it issued in February. The company's rising operating expenses seemed to cause concern on Wall Street, but investors need to look at the bigger picture.
Twilio's investments in product development and a new research and development center in India will put a dent in its bottom line this year. But those are necessary investments considering that Twilio operates in the fast-growing and competitive cloud communications space.
More importantly, the company said it expected to deliver 31% revenue growth in the current fiscal year. That's an impressive number, though the guidance was issued before the novel coronavirus pandemic slammed into the global economy.
Twilio's key customers such as Lyft, Uber, eBay, and others have been impacted by the virus. As a result, the cloud-based communications specialist is likely to witness a drop in traffic volumes as its clients' businesses decline. This near-term revenue risk is the reason why investment banking firm Piper Sandler downgraded Twilio stock from buy to neutral and slashed its share price target from $151 to $90.
So, it won't be surprising if Twilio's near-term financial performance takes a hit, which could lead investors to press the panic button once again. And that selloff would enhance the opportunity for those looking to buy into a long-term cloud play.
Sitting on a big opportunity
Twilio operates in the cloud-based contact center market, which is producing annual growth of 25%, according to third-party research, and could be worth $21 billion by 2022. That points toward a huge revenue opportunity for Twilio as its trailing-12-month revenue stands at $1.1 billion.
What's more, given the massive disruptions caused by the novel coronavirus, many more organizations might now be considering upgrading from their traditional on-premise call centers to cloud-based contact centers. A survey conducted by call center magazine Call Center Helper in September and October found that nearly a third of contact centers were either using the cloud or were in the process of transitioning to it. However, nearly 34% of contact centers were using legacy systems and weren't considering a transition to the cloud.
The remaining third of the respondents were in the planning stage of making the transition to the cloud. But the COVID-19 pandemic has forced corporations to operate their call centers with reduced staff due to social distancing measures. This enforcement measure could spur the transition to cloud-enabled contact centers and use emerging technologies such as artificial intelligence (AI) to serve their customers.
So, don't be surprised to see a jump in demand for services such as Twilio Autopilot, which allows organizations to build AI-enabled platforms to tackle customer queries.
In the end, Twilio could emerge from this crisis as a stronger company, making this growth stock an attractive bet at its current valuation.
