Twilio (TWLO 0.92%) has been hit especially hard during this tech company sell-off over the past few months. The stock peaked at over $400 in early 2021, but with a sky-high valuation of 36 times sales at the time, it failed to impress investors enough during its 2021 earnings reports, despite posting strong financial results.
Now that Twilio has fallen 55% from those highs, the company trades at a much cheaper valuation -- around 13 times sales before it reported its fourth-quarter earnings. Analysts were expecting a weak quarter with low top-line growth, but instead Twilio kept chugging along, posting figures that were much better than expected. Shares took off, jumping as much as 25% in the hours after the company reported these results. With a cheap valuation and unexpectedly strong earnings, is now the time to buy Twilio?
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Twilio is a leading consumer engagement platform that allows businesses to communicate better with customers. If you have had food delivered to you through a third-party app or taken a ride-hailing trip where you received text messages from your deliverer or driver, you've likely used Twilio's products without even knowing it. Twilio makes building these communication channels easy, but they allow for complex companies to engage more with their user bases. The company has seen slowing growth and higher customer churn coming out of the U.S. political election season, when it saw a major boost in revenue, but it still knocked the doors off of Wall Street's expectations for Q4.
A hot earnings report
Analysts were looking for $770 million in revenue, but the company reported $843 million. It also reported a net loss per share of $0.20 -- $0.02 better than what analysts were hoping for. This was on top of strong growth in its customer count, which grew 16% year-over-year to 256,000. The company benefited immensely in the year-ago period from U.S. political campaigns using Twilio to reach voters via messaging, so the fact that Twilio saw customer additions from these quarters is impressive.
What really pleased investors was the CEO's comments about profitability in his prepared remarks. Before the conference call, Jeff Lawson highlighted a goal of becoming non-GAAP profitable by 2023. Twilio has not been a profitable company -- it lost $950 million in 2021 -- so this commitment to profitability is an exciting endeavor for shareholders.
The company also highlighted guidance that left investors smiling. Twilio reiterated that it expects to continue growing its organic revenue by 30% or more year-over-year for at least the next three years, and management is guiding for organic revenue to expand 33% year-over-year. Twilio is an acquisitive company, so making sure that the company is using acquisitions to bolster its business rather than to be the sole driver of revenue growth is critical, and Twilio's guidance for continued organic success is encouraging.
What could still burn investors
It is important to note that while revenue blew past analyst expectations, it is still subpar compared to the past few years. The company has grown revenue above 62% year-over-year five out of the past eight quarters, far above the 54% year-over-year expansion Twilio posted in Q4. Investors have seen this trend of mediocrity compared to the past two years across the company's financials. 34% year-over-year organic growth was the slowest seen in the past two years, and Twilio's Q4 net expansion rate was the lowest -- even if you exclude political revenue from the year-ago period -- since Q1 2020.
Twilio is a relatively cyclical business, and it benefits immensely from U.S. political election campaigns using its products to reach voters. Q3 and Q4 2020 saw extreme benefits from this activity, which makes these comparisons less clear. However, this could signal that Twilio is beginning to see a slowdown, and it could potentially be leaving the growth stage of its lifecycle -- something investors might not want to hear.
Light at the end of the tunnel
The tech space at large has been seeing a reprieve over the past few weeks, and many companies have been able to bounce back after reporting strong earnings results. These companies have been hammered because of concerns about inflation, but this quarter's earnings have shown that many stocks like Twilio haven't been impacted by inflation, potentially meaning that the industry might be ready to bounce back.
For a long time, the major concerns for Twilio have been about its ability to continue growing organically and become profitable, both of which were addressed and look strong going forward. With these two major risks expected to be mitigated over the coming years, investors should be excited about Twilio's future, which is why I think shares are worth buying today.
