Cloud communications specialist Twilio (NYSE:TWLO) recently posted strong third-quarter results, beating Wall Street's consensus on both the top and bottom lines. Revenue surged 65% to $740 million, and adjusted profit came in at $0.01 per diluted share.

However, management's guidance fell short of analysts' expectations, and the stock got hammered, falling nearly 18% the following day. After that sell-off, shares of Twilio now trade at a 33% discount to their 52-week high. And many investors are probably wondering: Is now a good time to buy this growth stock?

Here's what you should know.

Software developer working on a project.

Image source: Getty Images.

Tailwinds from digital transformation

Twilio's software enables developers to embed communications features like text, voice, and video into their own applications. For instance, Twilio's technology powers Airbnb's messaging platform, Twitter's global phone system, and Shopify's customer support center.

Traditionally, building those types of products has been costly and time-consuming. Companies first had to provision specialized hardware, deploy robust IT support, and negotiate contracts with carriers around the world. Once that was done, they could actually start the development process. By comparison, Twilio's solution is much simpler and more cost-efficient. Clients can quickly provision the necessary resources through the cloud, without worrying about the underlying infrastructure.

In the coming years, digital transformation will make Twilio's value proposition all the more compelling. As more enterprises build out their online presence, providing an engaging customer experience -- that means timely, relevant communications -- will become more critical. In fact, management puts Twilio's market opportunity at $87 billion by 2023.

Pioneer in cloud communications

Twilio pioneered the communications platform-as-a-service (CPaaS) space. And over the last decade, the company has parlayed that first-mover status into a more substantial competitive position. In fact, the International Data Corp. (IDC) recently recognized Twilio as the CPaaS industry leader, citing its broad portfolio, reputable brand name, and strong growth strategy as important differentiators.

Moreover, the IDC noted that Twilio's top line grew 20 percentage points faster than the industry average last year, which means the company is still gaining market share. But that's not surprising. Twilio's platform has evolved beyond developer tools and now includes a robust suite of pre-built applications like Twilio Flex for customer service, Twilio Frontline for sales, and Twilio Engage for data-driven marketing.

To make these products even more powerful, Twilio acquired Segment last year, a customer data platform that captures information from virtually any consumer interaction. That means clients can surface relevant insights and personalize communications, making their customer service, sales, and marketing efforts more engaging (and more effective).

Solid financial performance

In short, Twilio has evolved beyond simple communications, and management now brands it as a customer engagement platform. And that strategic transition has supercharged demand. Twilio hit 250,000 customers in the most recent quarter, up 23% year over year. And its net expansion rate has been over 125% for the last 15 quarters, meaning customers are consistently spending more.

This compounding dynamic -- more customers and more revenue per customer -- has translated into strong sales growth.

Metric

Q3 2018 (TTM)

Q3 2021 (TTM)

CAGR

Revenue

$561.0 million

$2.5 billion

66%

Source: Twilio SEC Filings, YCharts. TTM = trailing 12 months. CAGR = compound annual growth rate.

Despite forecasting a wider fourth-quarter loss than Wall Street was expecting -- a result of acquisition-related expenses and aggressive investments in growth -- Twilio is making progress. The company has a solid competitive advantage, a strong growth strategy, and a big market opportunity. I think that implies plenty of potential upside for shareholders. And given that the stock trades well below its 52-week high, now looks like a good time to buy a few shares.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.