The market wasn't at all happy with Twilio's (TWLO -4.51%) third-quarter 2021 earnings update. Shares took a nearly-20% plunge following the report, and though the stock has rallied a little since then, Twilio is down 11% so far in 2021 with just two months left to go.
A steeper-than-expected loss in Q3 was to blame. It's not too surprising that some investors are losing patience with Twilio's lack of profitability. After all, this is now a massive digital communications firm that has hauled in over $2.5 billion in sales in the last 12-month stretch. However, viewed from one valuation metric, Twilio is now as cheap as it's been in over a year, and could be a fantastic buy for the ultra-long-term investor.
The good and bad quarterly numbers
As far as the headlines go, some aspects of Twilio's Q3 were exceptionally good. Revenue of $740 million represented a 65% year-over-year increase, obliterating management's outlook for as much as $680 million provided just a few months prior. Adjusted earnings per share of $0.01 were also far better than the $0.14 per share loss the company had said to be on the lookout for. Q4 guidance for revenue growth of as much as 40%, while light in comparison to Q3 results, could be easily topped again as Twilio tends to under-promise and over-deliver.
So what's the rub? On an unadjusted basis (which includes non-cash expenses like stock-based compensation, amortization of intangible assets, etc.), Twilio's net loss was $224 million in Q3, nearly double the $117 million net loss in the same period last year. Bear in mind that doesn't mean Twilio's cash, equivalents, and short-term investments on balance (which totaled $5.39 billion as of the end of September) evaporated by $224 million in Q3 alone. Free cash flow, which excludes non-cash expenses, was "only" negative $89.4 million through the first nine months of 2021, excluding the purchase of customer data analytics firm Segment last November.
Since a year ago, Twilio has also added just over 20% to its average number of shares outstanding via stock-based employee compensation and the Segment purchase. The company's revenue has far outpaced that figure, but some investors are clearly unhappy with the continual aggressive pace of spending to promote growth.
One reason the stock is a buy -- but for whom?
While Twilio's Q3 was a jumble of information that could be taken positively or negatively depending on your investment style, Twilio as a business is still very much in high-growth mode. Enduring steep losses isn't for every investor. However, if you have many years to buy and wait, and can add to your stake in Twilio over time (while simultaneously maintaining a diversified portfolio of other investments as well), this stock could be a great buy again right now.
In fact, on a price-to-sales basis, Twilio is cheaper than it has been since the first half of 2020. Sure, as measured by enterprise value (currently at nearly $48 billion), the company is far larger than it was a couple years ago, even after the post-earnings stock plunge. But in spite of its size, Twilio is clearly not hurting to find ways to expand its business.
Just bear in mind this company is for ultra long-term investors. Even Twilio's management team is pretty clear about this. They committed to list some shares on a new stock exchange called, uncreatively, the Long-Term Stock Exchange (LTSE), to reinforce the nature of the company's vision to build an iconic brand that will build wealth for all stakeholders for many generations to come. For now, that's going to mean patiently enduring red ink when Twilio reports on a quarterly basis.
Owning that kind of business may not jive with your style, and that's ok. But for those buying in on Twilio's goal to become the fuel for all sorts of digital communications present and future, there was plenty to be happy about in the Q3 report. The company is issuing lots of new shares to promote expansion, but its pace of sales growth is far faster. With the stock's valuation getting a significant hair cut, now looks like the time to add to an existing position for the long-term.