Cathie Wood, the founder and CEO of ARK Investment Management, grabbed headlines last year thanks to the terrific performance of five of her exchange-traded funds (ETFs) that registered gains of over 100%.
As the Motley Fool's Danny Vena points out, Wood was able to deliver impressive gains because of her focus on finding disruptive companies sitting on long-term secular catalysts. Twilio (TWLO -0.76%) is one such stock in Wood's portfolio. The cloud communications specialist is the 10th-largest holding in the ARK Innovation ETF, accounting for 3.3% of the fund's value.
As it turns out, Twilio stock is an attractive bargain right now after a 30%-plus price drop in the past three months.
Twilio stock is trading at less than 23 times sales, which is substantially lower than 2020's average price-to-sales (P/S) ratio of over 31. The stock was trading at more than 36 times sales in February after a strong start to the year before losing its wheels. The company's latest earnings report hasn't helped matters either, as its bottom-line forecast is worse than Wall Street's expectations. However, investors looking to buy a growth stock should focus on the bigger picture as Twilio's rapid growth is showing no signs of slowing down.
Twilio's pursuit of growth is bearing fruit
Twilio anticipates non-GAAP loss per share between $0.16 and $0.13 this quarter, missing the consensus estimate of $0.05 per share by a wide margin. This isn't the first time Twilio's bottom-line expectation has fallen way short of expectations, as the company has been aggressively going after the massive opportunity in the cloud communications market.
The strategy has paid off -- Twilio has been lapping up new customers at an impressive pace while encouraging existing customers to purchase more of its offerings. This is evident from the solid growth in the company's sales, customer base, and dollar-based net expansion rate last quarter.
Twilio's Q1 revenue shot up 62% year over year to $590 million, comfortably exceeding the consensus estimate of $532.9 million. The company finished the quarter with 235,000 active customers, up from 190,000 at the end of the prior-year period.
Twilio's dollar-based net expansion rate for the quarter stood at 133%. It was relatively consistent over the year-ago period's organic dollar-based net expansion rate of 135% (after excluding the contribution from Twilio's SendGrid acquisition in the year-ago quarter). The dollar-based net expansion rate increases when Twilio's active customers buy more of the company's offerings or increase the usage of their existing products. Simply put, the increase in this metric indicates that Twilio is able to drive more spending among existing customers.
These factors helped Twilio deliver solid top-line guidance. The company anticipates 47% to 50% year-over-year revenue growth to a range of $591 million to $601 million in Q2, well ahead of the $577 million that analysts expected. However, this pursuit of growth is coming at the expense of Twilio's bottom line.
The bottom-line woes shouldn't be a worry for growth investors
Twilio had posted an adjusted profit of $0.09 per share in the second quarter of 2020. So it wasn't surprising to see investors pressing the panic button after it announced its forecast for a much bigger loss this quarter. But a closer look at Twilio's expenses shows why it will swing to a loss this quarter.
The company has ramped up its sales and marketing expenses this year, while research and development expenses are also inching up as a percentage of sales. Twilio management explained why that's the case:
With regards to our operating loss guidance for the second quarter, as we have previously discussed, some of the investments we planned on making last year did not materialize as we had originally forecast due to COVID. Those investments are largely centered on enterprise sales, Flex and new growth products, plus core systems and infrastructure.
CFO Khozema Shipchandler added that the company has "largely caught up on the hiring related to these investments." He also remarked that the near-term losses caused by these expenses will help Twilio sustain high growth rates and scale up its business in the long run.
It is worth noting that Twilio has been growing at a faster pace than the market it operates in. The company's addressable market increased from $45 billion in 2017 to $62 billion last year. For comparison, its annual revenue has more than quadrupled from $399 million in 2017 to $1.76 billion last year.
Looking ahead, Twilio anticipates its addressable market to hit $87 billion by 2023. It excludes the $17 billion revenue opportunity in the customer data platform market added by the Segment acquisition completed last year. So, with the end market expected to grow substantially in the coming years, it is not surprising to see why Twilio is going after sales growth right now.
If the company continues to grow faster than the market it operates in, it won't be long before the stock regains its mojo. That's why it may be worth ignoring the near-term headwinds and buy Twilio stock after its recent pullback to take advantage of the long-term growth opportunity.