Cloud-based communications expert Twilio (NYSE:TWLO) reported third-quarter results on the evening of Monday, October 26. The company obliterated Wall Street's expectations across the board but management issued a mixed bag of fourth-quarter guidance targets. The stock dipped 4.5% on Tuesday morning but recovered quickly. Here's a closer look at the business reasons behind Twilio's impressive results and modest guidance.

Twilio's third-quarter results by the numbers

Metric

Q3 2020

Q3 2019

Change

Analyst Consensus

Revenue

$448 million

$295 million

52%

$410 million

GAAP net income (loss)

($117 million)

($88 million)

(33%)

N/A

Adjusted earnings (loss) per diluted share

$0.04

$0.03

33%

($0.03)

Data source: Twilio. GAAP = generally accepted accounting principles.

The results also compared favorably to Twilio's guidance for this period, which had pointed to a net loss of approximately $0.07 per share on sales of roughly $404 million.

The not-so-secret sauce

Twilio's strong third-quarter results boil down to one simple concept. This company has a serious business moat.

Here's how CEO Jeff Lawson describes Twilio's advantage over the competition.

"Our success is a testament to the value proposition that Twilio's platform offers businesses: digital engagement, software agility, and cloud scale," Lawson said on the earnings call. "Our goal is to build the world's leading customer engagement platform."

That approach has taken Twilio a long way already, but there's much more work to do. What started as a platform for digital voice calls in 2008 added text chats two years later, and the SMS service wasn't far behind. A much newer video-calling service took found a massive audience in 2020, as businesses of every caliber buckled down with cloud-based solutions for working from home. That surge did not slow down over the summer, and Twilio is putting its back into this product's continued success.

"Usage of Twilio Video has skyrocketed, and we want to get Video in the hands of as many developers as possible," Lawson said.

I'll show you how Lawson is doing it, too. R&D expenses consumed 59% of Twilio's gross profits in the third quarter. Sales and marketing accounted for 61% of the same operating revenue stream. Yes, that adds up to more than 100%. That's why Twilio isn't reporting positive GAAP profits or cash flows yet. Management still doesn't mind adding more fuel to those growth-boosting line items to strike while the iron is hot. Profits and cash flows will come several years later, supported by the largest possible customer base and revenue flow. This is high-growth business theory 101.

A businessman hangs on to his winged and jet-powered desk as it starts to take off.

Image source: Getty Images.

Is Twilio a buy today?

Twilio investors should keep a close eye on the company's top-line growth and worry a bit less about bottom-line profits.

Management expects an adjusted net loss of roughly $0.09 per share in the fourth quarter on sales in the neighborhood of $453 million. These targets sent a mixed message in comparison to Wall Street's consensus estimates, which call for earnings of $0.01 per share and revenues near $437 million.

Keep in mind that Twilio has a habit of setting low guidance targets and then crushing them in the final report. The story is probably the same this time. Officially, Twilio's guidance is modest due to uncertainty around the coronavirus pandemic. Realistically, the company's management is setting the bar low in order to smash its own and Wall Street's targets in the fourth quarter.

Value investors should look elsewhere but Twilio is an exciting ticker for growth investors. The stock has tripled in 2020 and there is plenty of rocket fuel left in Twilio's tank.

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.