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This Top Growth Stock Has Nearly Doubled in 2020 and Looks Good for More

By Harsh Chauhan – Updated May 18, 2020 at 8:42AM

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The migration of contact centers to the cloud is going to give this cloud specialist a nice boost.

It wasn't long ago that Twilio (TWLO 2.33%) looked like an attractive bet as it was trading at a relatively cheap valuation, but the company's fiscal first-quarter results have sent the stock through the roof.

TWLO Chart

Data by YCharts.

At the beginning of April, shares of the cloud communications specialist looked ripe for the picking in the aftermath of the March stock market crash caused by the novel coronavirus pandemic. There were concerns that Twilio's business may take a hit as key customers such as Lyft, Uber, and eBay reduce the usage of its services, prompting downgrades on Wall Street and sending shares lower.

But Twilio's latest results have put all those concerns to rest. First quarter revenue jumped 57% annually to $365 million, compared to consensus estimates of $328 million. What's more, it delivered $0.06 per share in adjusted earnings as compared to the market's expectation of an $0.11 loss. But the best part is that Twilio could get a shot in the arm thanks to COVID-19 and remain a top growth stock.

Hand drawing stock chart return.

Image Source: Getty Images.

What's driving Twilio's growth?

Twilio's business got a boost after shelter-in-place orders and lockdowns to contain the spread of COVID-19 were implemented across the globe. COO George Hu pointed out on the latest earnings conference call that Twilio's average daily sign-ups jumped 25% from March 18 through March 30 as compared to the first 11 weeks of the quarter.

This bump in customer sign-ups isn't surprising as Twilio provides a service that could prove to be critical in a post-coronavirus world. The company helps its clients move their contact centers to the cloud from traditional on-premise call centers. Twilio's API (application programming interface) allows its clients to connect with their customers through several channels such as text, chat, and intelligent IVR (interactive voice response) systems.

The advantage of cloud-based contact centers is that they can be set up at a much lower cost than traditional call centers, as the latter requires investments in hardware, office space, etc. A third-party report points out that the cost to set up a cloud-based contact center is 60% lower than the cost of a traditional one.

What's more, a cloud-based contact center also allows customer service agents to work remotely since they simply have to install an application on their computers (and use the internet) to serve customers. This not only allows a company to keep costs in check but also allows its customer service arm to keep functioning even if offices remain closed for a prolonged period of time in light of social-distancing norms.

This seems to have accelerated the transformation from traditional on-site call centers to cloud-based ones. According to Twilio's estimates, half of the 15 million contact center seats that are currently in the market will move to the cloud by 2025. That's a big jump as only 17% of the current call center capacity was in the cloud before the pandemic struck.

Is it still a good bet?

Twilio's guidance shows that it is all set to sustain its momentum in the current quarter. The company anticipates revenue between $365 million and $370 million this quarter, which would be a 34% increase over the prior-year period at the midpoint.

The tight guidance range implies the company is confident of hitting its target. That's not surprising as Twilio management said that the company is witnessing "a net increase in usage relative to our expectations and strong growth in the overall business." Additionally, Twilio has a robust balance sheet with $1.84 billion in cash and debt of $464 million.

In all, Twilio fits the bill of a coronavirus-resistant stock, but anyone looking to go long right now will have to pay a pretty penny. Twilio stock's latest surge has sent its price-to-sales ratio to 21, substantially higher than last year's average multiple of 12.

However, Twilio's valuation is rich for a reason right now. While the broader market has been rattled by COVID-19, its business is also holding up well, and its long-term growth prospects are accelerating.

At the same time, investors should keep in mind the potential pitfalls of investing in such a rich, high-growth stock. Any sign of weakness could send Twilio stock crashing, but the long-term story will remain intact as call centers move to the cloud.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool recommends eBay and Uber Technologies and recommends the following options: long January 2021 $18 calls on eBay and short January 2021 $37 calls on eBay. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Twilio Inc. Stock Quote
Twilio Inc.
TWLO
$78.03 (2.33%) $1.78
eBay Stock Quote
eBay
EBAY
$38.89 (-0.59%) $0.23
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$29.73 (1.88%) $0.55
Lyft Stock Quote
Lyft
LYFT
$13.70 (-0.36%) $0.05

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