Twilio (TWLO -1.49%) shares have taken a beating since the release of the company's third-quarter results last week, triggered by its guidance calling for a bigger loss this quarter than Wall Street expected. But savvy investors looking for an opening to buy a high-growth tech stock should appreciate the pullback in Twilio in the past three weeks given the company's bright prospects.
Here are a few reasons why you should consider buying Twilio in the wake of its recent dip.
Why investors shouldn't be worried about Twilio's earnings right now
The cloud communications specialist crushed Wall Street's revenue and earnings expectations last quarter. It clocked 52% year-over-year revenue growth to $448 million, along with adjusted earnings of $0.04 per share in the third quarter. Twilio beat its own guidance by a wide margin -- but also put investors off by offering an alarming bottom-line forecast for the current quarter.
Twilio anticipates an adjusted net loss between $0.08 and $0.11 per share this quarter, way below the market's expectations of a profit of $0.01 per share. But growth-oriented investors shouldn't read too much into these estimates, as Twilio has a habit of lowballing its guidance numbers and then blowing past them in the actual report. At the same time, the company's fourth-quarter revenue guidance of $450 million to $455 million indicates that its top line could jump more than 36% over the prior-year period.
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The big bottom-line miss that Twilio anticipates this quarter isn't surprising, as the company is expected to close the $3.2 billion acquisition of Segment. The completion of the acquisition is expected to have a "modest top and bottom-line impact in the fourth quarter" on account of integration costs, but that seems trivial given the huge opportunity that Segment could unlock for Twilio.
The important things that investors should be focusing on right now are the growth in Twilio's customer base and the company's fast-growing dollar-based net expansion rate. Twilio exited the third quarter with 208,000 active customers, up almost 21% from the prior-year period.
Its dollar-based net expansion rate came in at 137% during the quarter, up from 132% during the prior-year period. This is a positive sign, as the metric increases when Twilio's existing customers increase their spending on its services or adopt additional products. The good news is that Twilio has been sustaining impressive rates of growth in its active customers -- and the dollar-based net expansion rate -- for quite some time now.
Image source: Chart by author. Data from Twilio's quarterly reports.
Twilio's active customer base went up remarkably in the first quarter of 2019 thanks to the acquisition of SendGrid, which brought 80,000 new customers into the company's fold. The company's dollar-based net expansion rate started climbing after that move, as Twilio had a new service to offer to its existing customers. Moreover, Twilio also got an avenue to cross-sell its services to a large number of SendGrid customers.
A similar story could unfold once again -- by acquiring Segment, Twilio will be able to offer yet another service to its massive active user base. As it turns out, demand for integrating customer data on different platforms into a single one is growing rapidly, and Segment is a leader in that market, with a base of 5,000 customers.
The bigger picture remains bright
Twilio believes that adding Segment to its portfolio of services will boost its total addressable market to the tune of $17 billion. The combined company will have a total addressable market worth $79 billion in 2020. This means that Twilio could sustain its high rate of growth for a long time, as it is just scratching the surface of a massive end-market -- its trailing-12-month revenue stands at just $1.54 billion.
More importantly, Twilio's revenue opportunity is expected to expand at a terrific pace in the coming years. Excluding the customer data platform space, it anticipates its total addressable market to grow to $87 billion in 2023 from $62 billion this year, an increase of over 40%. From 2017 to 2020, Twilio's addressable market (excluding customer data) increased by almost 38%.
The fact that Twilio has been growing at a faster pace than the markets it operates in indicates that it is getting more dominant in its niches. In 2017, the company delivered annual revenue of $399 million. It is on track to deliver $1.66 billion in revenue (assuming it hits the mid-point of its fourth-quarter guidance range), which means that it has quadrupled its revenue over the past three years.
Armed with another new acquisition, Twilio now seems in a better position to go after a multibillion-dollar end market that could help it remain a top growth stock for years to come.
