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Should You Buy Twilio Stock After the Earnings Dip?

By Evan Niu, CFA – Oct 28, 2020 at 9:00AM

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The market wasn't enthused, but Wall Street analysts remain bullish on Twilio's future.

Investors weren't too impressed with Twilio's (TWLO 5.07%) third-quarter earnings release earlier this week, sending shares lower by 5% on Tuesday. That's partially due to the fact that the company had previously said it would beat its own guidance, so the market focused instead on mixed guidance for the fourth quarter. Market gyrations aside, the results pointed to solid long-term fundamentals.

Should you buy shares of the communications technology company after the dip?

Twilio logo

Image source: Twilio.

How Twilio performed in Q3

Revenue in the third quarter soared by 52% to $448 million, beating Twilio's guidance of $401 million to $406 million, as advertised. Dollar-based net expansion rate, which represents higher spending from existing customers, ticked up to 137%, and the total customer base swelled to 208,000.

Twilio also conducted a secondary offering in August to bolster the balance sheet at favorable terms, raising $1.4 billion in proceeds to be used for general corporate purposes. Seeing as how shares have nearly tripled year to date, Twilio was able to raise that capital with minimal dilution to existing shareholders -- those shares were sold at $247.

Investors were somewhat rattled by the company's outlook for the fourth quarter. While the top-line forecast -- $450 million to $455 million -- was ahead of what analysts are modeling for, Twilio expects to lose $0.08 to $0.11 per share on an adjusted basis. Wall Street was modeling for just $0.01 per share in adjusted losses.

It's worth noting that the guidance does not factor in the impacts of Twilio's $3.2 billion acquisition of Segment, which was announced earlier this month and is expected to close during the fourth quarter. That all-stock deal will result in various integration costs once it's completed, but Twilio only expects "modest" impacts to the business in the fourth quarter, CFO Khozema Shipchandler noted on the conference call with analysts.

Looking farther out, Twilio reaffirmed its medium-term guidance provided at its investor day event earlier this month, which calls for 30% organic annual growth over the next four years, and also does not reflect the Segment acquisition. By scooping up that customer data platform, Twilio is looking to expand its total addressable market by $17 billion.

Wall Street isn't worried

In the wake of the results, analysts have ratcheted up price targets while keeping mostly bullish ratings on the stock. Here's an overview of some of the changes:

  • KeyBanc: Maintaining overweight rating, boosts price target from $330 to $350.
  • Piper Sandler: Keeping overweight rating, increases price target from $315 to $365.
  • Mizuho: Maintaining buy rating, boosts price target from $350 to $370.
  • RBC Capital: Keeping outperform rating, raises price target from $375 to $400.
  • Goldman Sachs: Keeping neutral rating, boosts price target from $290 to $330.
  • BofA Securities: Reiterating buy rating, increases price target from $335 to $370.
  • Canaccord Genuity: Maintaining buy rating, raises price target from $380 to $385.

Wall Street doesn't seem too worried about one quarter's lackluster guidance, and instead is encouraged by the growth runway.

Evan Niu, CFA owns shares of Twilio. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

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