History repeated itself when Twilio (TWLO -0.28%) announced its third-quarter results, with investors ignoring its terrific pace of growth and panicking over the company's guidance for a bigger-than-expected loss. The cloud communications specialist smashed Wall Street's estimates convincingly on both revenue and earnings, and its sales forecast for the current quarter also exceeded expectations.
But, investors pressed the panic button after Twilio said that it expects to post a loss in the fourth quarter, compared to a profit in the prior-year period. The stock tumbled more than 10% after the report, just like a quarter ago when Twilio's Q2 results followed a similar script. However, investors looking to buy a cloud communications company for the long run should take a closer look at Twilio after its latest pullback, for the following reasons.
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Twilio has a habit of delivering conservative guidance
Twilio operates in the rapidly growing cloud communication platform market, which is expected to clock a compound annual growth rate (CAGR) of nearly 28% through 2026. The company's solutions allow companies to connect with their customers through various channels such as voice, messaging, and video.
It is outpacing the broader market's growth thanks to a mix of both organic and inorganic growth, as evident from the company's results. Twilio's top line jumped 65% year-over-year in the third quarter to $740 million, easily outpacing the consensus estimate of $681 million. Excluding the acquisitions of Segment and Zipwhip, Twilio reported organic growth of 38% year-over-year. The company reported a non-GAAP net income of $0.01 per share for the quarter, which was again well ahead of its guidance and Wall Street's expectations.
Twilio called for its Q3 loss to range between $0.17 per share and $0.14 per share when it released its second-quarter results at the end of July. Analysts were expecting Twilio to lose $0.14 per share in Q3 at the time, which means that its actual results are way ahead of what Wall Street was looking for three months ago.
The company forecasts revenue of $760 million to $770 million for the fourth quarter, while its adjusted loss is expected to range between $0.26 per share and $0.23 per share. The top-line estimate is well ahead of the $745 million that the market was expecting, but the estimated loss would be much higher than the $0.10 per share consensus estimate.
But we have already seen that Twilio has a habit of under-promising and overdelivering, which is also evident from the massive scale of its earnings beats over the past four quarters. More specifically, Twilio has outperformed consensus earnings estimates over the past four quarters by 157%, 155%, 15%, and 107%, respectively. As such, selling Twilio stock based on short-term guidance isn't a good idea, especially considering that the company is built for long-term growth.
Focusing on the bigger picture can reap rich rewards
A key reason why Twilio's quarterly performances turn out to be much better than expected is because of the incremental spending its drives from existing customers. This is evident from the dollar-based net expansion rate (essentially the ability to drive more spending from existing customers) of 131% in the third quarter. It compares the revenue from active customer accounts in a quarter to the revenue generated by those same customers in the prior-year period. An increase in this metric indicates that its active customers have either increased their usage of Twilio products or have bought new products from the company.
It is worth noting that Twilio has consistently clocked a dollar-based net expansion rate of more than 130% since the beginning of 2020 due to a sticky and quickly expanding customer base. The company ended the third quarter with 250,000 active customer accounts, compared to 208,000 accounts in the prior-year period. This paves the way for stronger growth in the future as the new customers adopt more Twilio products.
Not surprisingly, analysts expect Twilio's bottom line to increase at an annual pace of 20% for the next five years. However, it could do better thanks to the cross-selling opportunities arising out of the company's recent acquisitions, as Twilio can now offer a broader range of services to its new and existing customers.
In all, Twilio could continue to grow at a faster pace than the cloud communications market. What's more, the stock is now trading at 19 times sales, which makes it much cheaper than the 2020 average sales multiple of over 31. And with analysts expecting the company's earnings to clock a CAGR of 20% for the next five years, Twilio's latest pullback could be an opportunity for investors to buy this growth stock at a relatively cheaper valuation.
