Twilio's (NYSE:TWLO) stock recently surged to an all-time high after the cloud services provider posted impressive first-quarter numbers. Its revenue rose 57% annually to $364.9 million, beating estimates by $36.6 million. Its adjusted net income grew 30% to $8.4 million, or $0.06 per share, and crushed expectations by $0.17 per share.

Twilio expects its revenue to rise 33%-35% annually in the second quarter, but withdrew its prior full-year outlook for 30%-31% revenue growth in light of the COVID-19 pandemic. The decision wasn't surprising, since many other tech companies recently suspended their forecasts, but Twilio's core business seems well-insulated from the pandemic.

A woman sends text messages on her smartphone.

Image source: Getty Images.

Why is Twilio growing?

Twilio's cloud service processes calls, text messages, videos, and other content for mobile apps. In the past, developers coded those features from scratch, and the process was buggy, time consuming, and difficult to scale as an app acquired more users.

Twilio simplified the process with a few lines of code called an API (application process interface), which outsources those features to its cloud platform. Companies like Lyft (NASDAQ:LYFT), Uber (NYSE:UBER), Airbnb, and Instacart all let Twilio handle integrated calls and messages on their apps as they focus on developing their core features.

Twilio has a first mover's advantage in this market, and its business is booming. Its revenue growth is gradually decelerating, but its dollar-based net expansion -- or its growth per active customer -- has consistently remained above 100%:

Growth (YOY)

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Revenue

81%

86%

75%

62%

57%

Dollar-based net expansion

146%

140%

132%

124%

143%

YOY = Year-over-year. Source: Twilio quarterly reports.

That growth rate indicates Twilio's active customers are using its services more frequently, its newer services are boosting its revenue per customer, and it enjoys robust pricing power and a wide moat against potential rivals like Vonage's (NYSE:VG) Nexmo and MessageBird.

Is COVID-19 a tailwind or headwind for Twilio?

The COVID-19 crisis is generating both tailwinds and headwinds for Twilio. Its customers in the telehealth, online education, remote customer care, food delivery, non-profit, and retail logistics sectors have all accessed its services more frequently as the crisis has intensified.

Usage of travel apps initially surged as customers canceled or rebooked their plans, but a "stark decline" followed as the airline and hotel industries hit a brick wall. Uber and Lyft also served fewer passengers as more people stayed at home.

Twilio remains "cautiously optimistic," as CEO Jeff Lawson declared during the conference call. Yet even Lawson admitted that "no one can predict what exactly will transpire in the back half of the year given the uncertainty of the macroeconomic environment."

In short, Twilio's tailwinds offset the headwinds in the first half of the year, but there's no guarantee that its weaker markets will eventually overwhelm its stronger ones. That uncertainty makes it tough to overlook Twilio's three biggest flaws: its GAAP losses, rising share count, and its lofty valuation.

Is Twilio's soaring share price justified?

Twilio is only profitable on a non-GAAP basis. On a GAAP basis, which includes stock-based compensation and other variable expenses, its net loss widened annually from $36.5 million to $94.8 million last quarter. Its stock-based compensation expenses consumed 19% of its revenue during the quarter, compared to 25% a year earlier.

Twilio's cash and equivalents rose 36% to $345.5 million, but that gain mainly came from a massive secondary offering last year. That's why its total number of outstanding shares surged 47% annually to 139.2 million during the first quarter.

As a result, Twilio's stock trades at 18 times this year's revenue forecast, which is a frothy valuation for a company with slowing revenue growth, a rising share count, and widening GAAP losses. The bulls might believe Twilio's first mover's advantage, loyal customer base, wide moat, and insulation from COVID-19 justify that premium -- but the stock is arguably getting ahead of itself.

Rough seas ahead

Twilio trades like it's immune to the COVID-19 crisis, but it isn't. The tailwinds are offsetting the headwinds right now, but that trend could still reverse in the second half of the year. Twilio remains an appealing growth stock for investors who can stomach the near-term volatility, but the stock looks overvalued and overbought after its latest rally.