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Buy This Top Cathie Wood Stock Before It Breaks Higher

By Harsh Chauhan – Aug 12, 2021 at 7:15AM

Key Points

  • The stock price of one of Cathie Wood's top holdings has pulled back after its latest earnings report.
  • Near-term issues shouldn't discourage investors from buying Twilio stock given its long-term potential.
  • Twilio is rapidly adding new customers and is also driving additional spending from the existing ones.

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This cloud stock is the ninth-largest holding in Wood's ARK Innovation ETF, and it recently became an attractive buy.

Cathie Wood, the founder and CEO of ARK Invest, has gained immense popularity among retail investors thanks to strong performance from many of the company's exchange-traded funds (ETFs). The stock price of the ARK Innovation ETF, for instance, has soared close to 150% since the beginning of 2020 and crushed the broader stock market's gains handsomely.

ARKK Chart

ARKK data by YCharts

The terrific gains are a result of Wood's strategy of investing in disruptive tech companies, such as cloud communications specialist Twilio (TWLO 7.15%). Twilio is among the top 10 holdings in the ARK Innovation ETF, accounting for 3.66% of the fund's value. The stock has more than tripled in value since January 2020, but investors who have missed this terrific rally now have a golden opportunity to go long Twilio. Let's see why.

Twilio's latest slip is an opportunity in disguise

Twilio stock price fell after the company released its Q2 earnings report, which seems surprising as it easily beat Wall Street's expectations. It reported a 67% year-over-year increase in revenue to $669 million, while non-GAAP loss per share increased from $0.09 in the prior-year period to $0.11 last quarter.

Analysts expected Twilio to lose $0.13 per share on $598 million in revenue. However, it looks like Twilio's guidance for a bigger-than-expected loss this quarter may have triggered some panic among investors. Twilio expects to lose between $0.14 and $0.17 per share this quarter on revenue between $670 million and $680 million. Wall Street was expecting a smaller loss of $0.07 per share on $636.4 million in revenue.

Man and woman looking at a laptop screen.

Image source: Getty Images.

But investors shouldn't be focusing on Twilio's near-term bottom-line miss, as it is pulling the right strings to ensure growth in a lucrative market. Its revenue is on track to increase 50% to 52% year over year this quarter -- but don't be surprised to see Twilio do better than that, for a couple of reasons.

First, the company's customer base is expanding at a quick pace. It finished Q2 with 240,000 customer accounts, compared to 200,000 in the year-ago period. The acquisitions of Segment and ValueFirst accounted for 7,500 of those customer additions.

Second, Twilio is generating incremental business from existing customers. This is evident from the company's dollar-based net expansion rate of 135% in Q2, up from 132% in the prior-year period. The dollar-based net expansion rate increases when Twilio's active customers increase their usage of products they are already using or buy additional services from the company.

It is worth noting that the metric wasn't impacted by the acquisitions of Segment and ValueFirst, as the dollar-based net expansion rate is calculated based on those active customer accounts that were present in the prior-year period. The new customers brought in by those acquisitions can boost spending if they decide to opt for Twilio's other products. Additionally, Twilio's existing customer base now has additional services to choose from, paving the way for further growth in the dollar-based net expansion rate in future quarters.

Investors shouldn't forget that Twilio added another fast-growing company to its portfolio recently. The company recently spent $850 million to acquire toll-free messaging provider Zipwhip, bringing 30,000 new customers into its fold.

Now, this acquisition-driven strategy is impacting the company's bottom-line performance because of acquisition-related expenses. For instance, it incurred $2.5 million in expenses to acquire Zipwhip. But investors shouldn't miss the forest for the trees, as Twilio's strategy of spending money to boost its top line will come in handy in the long run.

Focus on the bigger picture

Twilio is focused on grabbing as big a piece of the cloud communications market as possible. This is a smart thing to do, as the cloud communications market is expected to clock a compound annual growth rate of nearly 28% through 2026, and Twilio is currently growing at a faster pace than the space it operates in.

The company's acquisitions indicate that it intends to keep outpacing the broader industry's growth, a strategy that could substantially boost revenue in the long run and eventually pave the way for bottom-line improvements. Twilio estimates that its addressable market could hit $87 billion by 2023, a number that rises to $104 billion after including the revenue opportunity added by Segment.

So Twilio is just scratching the surface of a massive opportunity given that it has generated $2.25 billion in revenue in the past year. As such, it should be able to sustain its high levels of growth in the long run. That's why investors looking to add a growth stock to their portfolios can treat the recent slip in Twilio as a buying opportunity.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Twilio Stock Quote
$49.02 (7.15%) $3.27
ARK Innovation ETF Stock Quote
ARK Innovation ETF
$37.48 (7.70%) $2.68

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