Please ensure Javascript is enabled for purposes of website accessibility

1 Stock Slumped Despite Strong Earnings. Should You Buy the Dip?

By Jamie Louko – Nov 2, 2021 at 6:10AM

Key Points

  • Twilio shares sunk after a strong earnings report that still left Wall Street wanting more.
  • Earnings were not perfect, but overall, they were very strong.
  • With shares down almost 20% since Oct. 27, now could be a time to add to your position.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The market often offers unexpected discounts on great companies. Is that the case with Twilio?

Twilio (TWLO 5.07%) dropped nearly 18% after it reported relatively strong earnings after the market's close on Oct. 27. The business saw strong growth in revenue, but other factors led to the drop. 

With the goal of becoming the leading customer engagement platform, Twilio makes it easy for enterprises to communicate with customers --whether it is by text, email, or call. It can be very appealing to buy high-quality companies at discounts like Twilio right now, so should you be buying the dip?

Person scratching his head while looking at a computer monitor.

Image source: Getty Images.

What caused Twilio's stock to drop

Twilio dropped for three primary reasons. First, the company announced that its chief operating officer (COO) George Hu will be leaving the company effective immediately. And Khozema Shipchandler, who has been Twilio's chief financial officer since 2018, will become the new COO. "After doing an amazing job scaling Twilio from a run rate of $300 million to nearly $3 billion," Twilio's CEO Jeff Lawson said, Hu has ambitions " to eventually move beyond a COO role." While Hu has been a key part of the executive team for Twilio, Shipchandler and Marc Boroditsky -- the current chief revenue officer who will take over the go-to-market strategy -- are highly intelligent executives who have been with Twilio for a combined total of 9 years.

The second potential reason the company dropped was that the company reported guidance that was weaker than analysts were expecting. Twilio guided for a fourth-quarter 2021 earnings loss of $0.26 to $0.23 per share, but analysts were expecting a loss of $0.04 per share. It did, however, offer strong revenue guidance of $760 million to $770 million, which represents roughly 40% growth from Q4 2020.

Lastly, Twilio's valuation going into earnings was sky-high -- trading around 26 times sales. This high valuation was assuming extremely strong results, so when the company stumbled on its guidance, the stock tumbled.

The silver lining in the earnings report

There was, on the other hand, a lot to like in Twilio's third-quarter earnings. The company reported Q3 2021 revenue of $740 million, which grew 65% from the year-ago quarter. Twilio also reported a net expansion rate -- which does not include customer churn -- of 131%. Its active customer base grew 20% from the prior year to 250,000.

Twilio is known to be a serial acquirer. Its most recent acquisition was Zipwhip -- a leading provider of toll-free messaging. Although the company does acquire businesses often, a strong portion of revenue came from its core business this quarter. About 82% of Twilio's Q3 revenue was organic, which increased sequentially from Q2 2021. Even though some investors might worry that Twilio is only growing by acquisition, the company proved that its organic growth is remaining strong. 

The company's top 10 customers dropped to 11% of revenue, demonstrating the company's ability to gain more customers to diversify its revenue. Its non-GAAP gross margin reached 58% and its Q3 non-GAAP gross profit reached $400 million, growing 63% from the year-ago quarter.

What you should walk away with

This quarter was not the strongest quarter the company has ever had. Its expansion rate was lower than previous quarters and organic revenue growth slower than other quarters as well. Nonetheless, this company is big -- it has made almost $2 billion this year -- and is still growing revenue at a 60% rate, which is phenomenal. One of the company's main concerns -- its growth mainly coming from acquisitions -- was met with strong financials that showed its core business is still thriving. 

With Twilio still seeing strong success and growth in Q3, which is expected to continue throughout the next quarter, it is appealing to see Twilio at an 18% discount from just last week. The company's valuation is much more attractive, too; it now trades at 20 times sales. While some of Twilio's losses were justified, the massive drop that took place seems a bit excessive, leaving some room for investors to buy the dip. 

The company is heavily fueling research and development to continue its growth, with over 40% of its total employees on the research and development team. In addition, it has reported spending $210 million on R&D in Q3. Twilio is reshaping how efficiently enterprises communicate with their customers, and a little weak guidance for one quarter would likely not prevent this from continuing. As a result, I think that this downturn after a strong earnings report is an alluring buying opportunity for investors, and I will likely be investing more in Twilio by the year's end.

Jamie Louko owns shares of Twilio. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.