Shares of Twilio (NYSE:TWLO) are up over 160% so far in 2020. The company is getting a boost from the pandemic as its customers both old and new scramble to update their operations for a new digital age. Plus, at the onset of the year, the stock was attractively priced, so positive results were bound to lift shares higher.

But after the big run-up, a few things may give investors pause. After all, the stock is trading for some 21 times forward revenue estimates -- a steep price tag even if this is a high-growth software technologist. However, for investors looking at the opportunity over the next decade, the timing may not be perfect, but Twilio remains a buy.  

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Image source: Getty Images.

Demand for a new type of communication

Expectations were high, but Twilio's second-quarter 2020 report card didn't disappoint. Active clients increased 24% from a year ago and topped 200,000. The top 10 highest-spending customers accounted for 15% of sales, making this a well-diversified company that won't stumble hard if a few clients decide to leave. And dollar-based net expansion was 132%, implying existing customers spent 32% more than they did in the prior-year period.

All told, it equated to a 46% jump in revenue to $401 million during the quarter. Paired with first-quarter results (and with guidance for at least another 36% jump in revenue in the third quarter), 2020 is shaping up to be another banner year for Twilio.

Metric

6 Months Ended June 30, 2020

6 Months Ended June 30, 2019

Change

Revenue

$765.7 million

$508.2 million

50.7%

Gross profit margin

52.6%

54.3%

(1.7 pp)

Operating expenses

$598.0 million

$457.4 million

30.7%

Adjusted net income

$22.4 million

$11.3 million

98.4%

PP = percentage point. Data source: Twilio.

Now having fully digested the early 2019 takeover of SendGrid, it's clear that Twilio's customer experience platform still has some serious steam propelling it higher. Be it text messaging or full-blown tech-enabled call centers, organizations are in dire need of some upgrades when it comes to keeping in touch with their patrons. And Twilio is largely responsible for kicking off the movement in the first place, giving it an early lead as digital communications become increasingly important. 

Focus on the long term

Speaking to how COVID-19 has altered the course of this migration to tech-driven means of keeping in touch, Twilio CEO Jeff Lawson had this to say on the second-quarter earnings call:

Our customers in nearly every industry have had to identify new ways to communicate with their customers and stakeholders, from patients to students, to shoppers and even employees essentially overnight. In fact, in a recent Twilio global survey of more than 2,500 enterprise decision-makers, 97% believe COVID-19 has accelerated their company's digital transformation efforts. We also found that companies' digital communication strategies were accelerated by an average of six years. Barriers like lack of clear strategy or getting executive approval or reluctance to replace legacy software and lack of time have broken down, and budgets are increasing as companies are seeing new ways of engaging customers.  

This isn't a trend that will evaporate once the world starts to normalize post-pandemic. These digital investments span industries from healthcare to education and financial services, and they are structural changes that were already in the process of getting updated and replaced. And though several years of digital communications growth have been crammed into 2020, this is a long-term trend that will continue to fill Twilio's sails for a while. The customer experience industry is expected to grow about 18% a year through 2027, in which time annual spending would top $23 billion if those growth rates transpire.  

It carries a premium price tag, and I fully expect revenue growth will slow down in the second half of 2020 and into 2021. But that certainly doesn't dampen Twilio's prospects. This is a burgeoning industry, and virtual communication needs will continue to evolve, while Twilio's cloud-based portfolio of tools is fully capable of scaling up to meet the challenge. Is now the best timing to make a purchase? Probably not. But if you're thinking long-term, the run-up in stock price this year isn't so concerning.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.