What determines whether a stock goes up or down? A healthy and growing business will tend to see its share price rise over the long haul because it's creating value for shareholders with growing revenue and profits. But in the short term, the winds of the stock market can be a bit unpredictable.
The stock price of cloud communications company Twilio (TWLO 1.42%) has fallen more than 50% over the past year -- and many other growth and technology stocks have taken similar tumbles. But despite what that adverse price action might lead you to expect, good things are happening within Twilio's business.
Here are three positives to note and why long-term investors should be thanking Wall Street's fickle nature for this buying opportunity.
Image source: Getty Images.
1. Growth remains strong
Twilio operates a software platform that its clients use to build tools with which they can communicate with their own customers. In that vein, it facilitates embedded messaging on apps and websites, programmable text messaging, and more.
The business has grown rapidly for several years. Revenue rose from $277 million in 2016 to $2.8 billion in 2021, an annualized growth rate of 59% per year. And in 2021, it put up 61% annual revenue growth, showing it still has momentum.
The company now has 256,000 active customer accounts, up from around 221,000 a year ago. Additionally, Twilio has maintained a dollar-based net expansion rate of 130%, which reflects that on average, the company's existing customers are spending steadily more on the platform.
2. Twilio's just getting started
Buying Twilio stock today would require conviction about the company's future performance, so while these recent growth figures are good to see, the more important question for potential investors is, what's next? CEO Jeff Lawson spoke to management's confidence about the company's prospects during the recent fourth-quarter earnings call, referencing its 34% organic revenue growth rate in 2021, and saying he expected to hit that number again over the next several years. Investors should keep in mind, though, that growth can be cyclical, so it could be lumpy at times.
But for a long-term investor, the prospect of Twilio delivering organic growth at a rate of 30%, not to mention the potential for it to grow via acquisition or other methods, should be appealing. The company's runway for growth is long in the grand scheme of things. Consider that there are an estimated 213 million companies globally, so Twilio's customer base represents just over 0.1% of its potential market.
Even if the company never works with more than a single-digit percentage of the world's businesses, it has room for many years of continued strong customer growth, and that's before factoring in the spending increases that occur once companies are on board.
3. Profitability on the way?
Twilio's lack of profitability is something that one could be understandably concerned about. Its gross profit in 2021 was $1.4 billion, but because it spends so heavily on sales and marketing and research and development, it posted an operating loss of $915 million. With annual revenue approaching $3 billion, when should investors expect the company to make money?
CFO Khozema Shipchandler spoke to that point in this month's earnings call:
"And I would add that up to this point, we really prioritize growth in scaling the company ... But I think we're at the point now where we've got enough scale that we can actually start reaping the benefits of that scale, and just become more efficient in our cloud operations. And so we see a real efficiency opportunity as we move it out, and we're really confident in our ability for non-GAAP profitability in 2023."
In other words, the company's revenue growth should further outpace its spending growth, which could push the business toward profitability over the next couple of years. The adjusted gross product margin last quarter was 54.8%, but management has set a long-term target for that metric to exceed 60%, indicating confidence in its ability to keep expanding its margins. Investors will want to keep an eye on Twilio's progress toward that goal.
Caught in a downdraft
In all, investors seemed to like a lot about Twilio's quarterly report, but the market's broader tech sell-off, high inflation, and anticipation of the higher interest rates that will be deployed against that inflation have combined to keep Twilio's stock this month near the lowest prices it has traded at over the past year. Meanwhile, its valuation is near its lowest of the past several years on a price-to-sales basis.
TWLO PS Ratio data by YCharts
That valuation seems low enough that most of the growth the business generates from here should be reflected in the stock price's movement. Twilio seems like an attractive bargain today, based on its steady record of execution and the company's long-term growth opportunities. Buy-and-hold investors should take advantage.
