In-app communications specialist Twilio (NYSE:TWLO) helps developers interact with users without leaving an application, facilitating embedded features like text messaging, voice, and video.
Even those with little coding experience are able to take advantage of Twilio's technology, while its application programming interface (API) allows software developers to automatically embed these functions for real-time customer engagement, a new opportunity for the future.
That has been a winning combination for this growth tech stock, which has soared 645% over the past five years, compared to a 113% gain for the S&P 500. Yet more recently, doubts are creeping in about Twilio's ability to maintain that momentum.
Its most recent earnings report disappointed the market, sending its stock careening lower, and Wall Street has readjusted its outlook for the company. Is the future for Twilio bullish or bearish? Here are two Motley Fool contributors laying out the case for each.
Bull case: Twilio has laid the foundations for growth
Keith Noonan: Twilio provides in-app communications, SMS messaging, and automated voice call software, allowing companies to keep in touch with their customers. Its API software also provides solutions for user authentication, video, and live streaming.
The company has grown rapidly, and it now plays a huge role in providing communications technologies and services for a wide customer base. However, the stock has seen some volatile swings across 2021, and it now trades down roughly 36% from the lifetime high it hit earlier this year.
Twilio's share price sank after the company paired its third-quarter earnings report with guidance for a wider-than-expected loss in the fourth quarter. The company grew its revenue 65% year over year last quarter, or 38% after backing out the contribution from acquisitions. While organic growth appears to be slowing for the business, Twilio is still expanding at a healthy clip, and the foundations for strong long-term performance are in place.
More than 250,000 customers depend on the company for communications software solutions, and Twilio's ability to provide one-stop-shop services that simplify processes and provide simplified interfacing for customers is helping to increase spending. The company posted a net revenue retention rate of 131% in the period, meaning that existing customers boosted their spending 31% compared to the prior-year quarter.
If Twilio can keep bringing new customers on board and providing service that encourages existing clients to increase their spending, the stock should have plenty of room to run. Communications services are becoming increasingly central to business and everyday life, and I think there's a good chance Twilio will be able to add new services through acquisitions and leverage its strong core business to create a comprehensive product offering that's a go-to choice for enterprise customers.
Bear case: Twilio's overpriced, even if it is the leader
Rich Duprey: Everyone wants in on customer data, and that includes Twilio, which purchased Segment.io for $3.2 billion last year to let companies personalize communications with customers. While that could give the in-app communications specialist a new avenue of growth, it also changes its focus, transforming from one focused on cloud communications to one targeting customer engagement.
The difference is subtle, but important, because it is moving from one highly competitive market to another, one that's arguably even more crowded, at a time when growth in its existing market is decelerating rapidly. While I don't think Twilio is a bad company, I think it's overvalued, even after the crash in the stock following earnings.
That's what really forms the crux of the bear argument here. Despite being a strong leader in its space with a promising trajectory in the years to come, the slowdown in business, the lackluster organic growth, and the uncertainty created by the resignation of its COO are only enhanced by the weak guidance the company offered.
Investors need to be able to wrap their heads around why organic growth fell to 38% in the current quarter from 50% in the second, and why management's guidance suggests it will only see about low-20% organic growth in the fourth.
Twilio is trying to offset that with a growth-by-acquisition, not only acquiring Segment, but earlier this year also buying Zipwhip, Ionic Security, and ValueFirst. Before that, the software-as-a-service stock purchased SendGrid and Core Network Dynamics. In all, Twilio has paid about $6.2 billion to bolster its business. This introduces a bit of risk into an investment, since acquiring companies isn't a problem until it's a problem, which often happens.
At 20 times sales, Twilio's stock isn't cheap, even though shares are down over 10% since reporting earnings, are off 17% year to date, and have tumbled 39% from their 52-week highs. That's elevated even for an up-and-comer like Twilio, but especially for one whose business seems to be slowing.
That's why, although I still see a promising future for the company, investors should probably bide their time until there is greater clarity around its ability to gain traction once more.