Shares of Twilio (TWLO 3.45%) have taken a big beating on the stock market so far in 2022, crashing 57% even though the company started the year on a high with a solid set of fourth-quarter 2021 results in February.
Twilio investors had shown confidence in the stock at that time as it had shot up 19% in extended trading following the release of its results, which turned out to be better than expected. But the cloud communications specialist has been hammered badly since then by the broader sell-off in tech stocks, which can be attributed to a variety of factors such as surging inflation, geopolitical instability in Europe, and a hawkish Federal Reserve.
With the company set to release its first-quarter 2022 results after the market closes on Wednesday, May 4, investors will be looking for a turnaround in Twilio's fortunes on the stock market. But is that going to happen? Let's find out.
Twilio is built for terrific growth
According to the guidance Twilio had issued in February, its revenue should increase 46% year over year to $860 million. Twilio has also called for impressive organic growth of 33% over the prior-year period, which excludes the impact of the company's acquisitions. Analysts were originally expecting Twilio to deliver $804.6 million in revenue for the first quarter, but they have raised their expectation to $863.5 million now, which sits at the higher end of the company's range.
However, Twilio could report a massive adjusted loss of $0.24 per share as compared to a profit of $0.05 per share in the prior-year period. Analysts are expecting a slightly smaller loss of $0.22 per share, which is at the higher end of the company's guidance. This terrible bottom-line performance has been one of the reasons why investors have dumped Twilio stock this year, but management is confident of achieving profitability on a non-GAAP basis in 2023.
More specifically, Twilio management remains confident of the company's ability to clock a 60%-plus gross margin profile in the long run. For comparison, it exited 2021 with an adjusted gross margin of 51% thanks to a sharp increase in spending on sales and marketing, research and development, and stock-based compensation.
However, Twilio believes that its acquisitions and efforts to boost the sales force will lead to an increase in cross-selling opportunities, and that reflects in the company's dollar-based net expansion rate. Twilio's dollar-based net expansion rate has consistently remained over 130% in each quarter in the past couple of years (on an adjusted basis). This metric increases when Twilio customers increase their usage of a service or adopt a new product.
In simpler words, Twilio's existing customer base is spending more money on the company's offerings, and that should have a positive impact on the bottom line in the long run. Not surprisingly, analysts expect Twilio's bottom line to jump 160% in 2023 following an increased loss this year. What's more, Twilio's earnings are expected to clock a 20% annual growth rate for the next five years.
A solid long-term bet right now
Twilio's severe sell-off has brought the stock's price-to-sales ratio down to 6.8, which is a big discount to its five-year average multiple of 17. Buying Twilio at this valuation looks like a no-brainer, as the company could grow at an impressive pace for a long time to come given the industry it is operating in.
The global cloud communications market is expected to grow from just $4.6 billion in revenue last year to $22.4 billion in revenue by 2028, clocking a compound annual growth rate of 25%. Twilio generated $2.84 billion in 2021 revenue, indicating that the company holds a huge chunk of this fast-growing market.
That's why it would be a good idea to take advantage of the drop in Twilio and buy the stock this earnings season while it is still cheap, since the company looks built for terrific long-term growth.