September has been a challenging month for stocks, bringing a pause to 2021's bull market. The S&P 500 and the Nasdaq Composite have slid about 1.6% and 2.1%, respectively. While it's never fun to watch your stocks decline, it does make opportunities for investors looking to deploy new capital more attractive. Even better, some stocks fall even more than the overall market during pullbacks, sometimes creating particularly good buying opportunities.
One stock that looks like an attractive investment after the market's September pullback is cloud-based communications tools and services specialist Twilio (TWLO -1.49%). With the growth stock falling about 4% month to date, it's a good time for investors to take a closer look at this fast-growing tech company.
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Strong fundamentals
Don't let Twilio stock's 4% decline in September fool you. The growth stock is well-liked on Wall Street. Shares are up 40% over the past year and 250% since the beginning of 2020.
The company's most recent quarterly results helped drive home exactly why investors have come to love this stock. Its fiscal second-quarter revenue of $669 million was up 67% year over year. This was a significant acceleration over the 62% growth the company posted in its prior quarter.
Growth in the period was driven by a combination of 5,000 new active customer accounts compared to just three months earlier and an impressive dollar-based net expansion rate among its existing customers of 135%. This was an acceleration from 132% in the year-ago period and 133% in the prior quarter.
"Companies across industries are adopting our platform to drive better, more personalized levels of customer engagement," explained Twilio co-founder and CEO Jeff Lawson in the company's fiscal second-quarter earnings release, "and we remain convinced that we are in the midst of a massive shift that is driving a generational opportunity for Twilio."
With such staggering growth, Twilio now has an annualized revenue run rate of greater than $2.6 billion.
A pricey but well-deserved valuation
While this is all great, some investors may remain on the sidelines because of Twilio's premium valuation. With a $61 billion market capitalization, Twilio currently trades at 23 times its revenue run rate. For a company that's not even profitable yet, this is quite a premium.
But investors should note that Twilio's business model is highly scalable, meaning that profits should improve faster than revenue as the company matures. This could lead to enormous bottom-line improvement over the next 10-years. Over the long term, management expects its non-GAAP (adjusted) gross profit margin will expand to a range of 60% to 65%, well above its current trend of being around 55%. Even more notable, the company expects its non-GAAP operating margin to eventually swell to 20%. While there's no exact date on these targets, rapid revenue growth combined with operating leverage should combine to create a strong catalyst for the stock over the next five to 10 years -- albeit with some unavoidable volatility along the way.
While the stock is certainly riskier than some companies already producing significant profits relative to their valuation, investors with a high risk tolerance may want to consider investing a small portion of their capital in this fast-growing company's shares while they are trading lower. Over time, Twilio has a shot at morphing into one of the biggest technology companies in the world.
