Twilio's (TWLO 2.80%) stock has tumbled nearly 60% this year as investors fretted over the cloud-based communication platform company's decelerating growth, declining gross margins, and widening losses. The broader sell-off in higher-growth tech stocks, which was mainly driven by rising interest rates and other macro headwinds, exacerbated that pain.

But has that steep sell-off presented a buying opportunity for long-term investors who can tune out the near-term noise? Let's review Twilio's business model, its challenges, and valuations to decide.

A woman uses a smartphone.

Image source: Getty Images.

What does Twilio do?

Twilio's cloud-based platform handles text messages, voice calls, videos, authentication alerts, and other features for mobile apps. Instead of building those features from scratch -- which can be time-consuming and difficult to scale as an app gains more users -- developers simply outsource those features to Twilio with a few lines of code.

Today, Twilio's services connect the hosts of Airbnb to their guests, the drivers of Lyft to their passengers, and the American Red Cross to its volunteers. It also established an early mover's advantage against other cloud-based communications platforms, like MessageBird, Vonage's (VG) Nexmo, and Bandwidth (BAND 1.01%).

How fast is Twilio growing?

Twilio's number of active accounts grew 14% year over year to 268,000 in the first quarter of 2022, but that represented a significant slowdown from its previous quarters. Its revenue growth has also decelerated for three straight quarters, even after we factor in its recent acquisitions. Here's a look at the recent year-over-year numbers.

Metric

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Active accounts

24%

20%

20%

16%

14%

Revenue

62%

67%

65%

54%

48%

Data source: Twilio.

Twilio's revenue rose 61% to $2.84 billion in 2021, but a lot of that growth came from its acquisitions of Segment and Zipwhip. Excluding those two acquisitions, its revenue grew only 42% on an organic basis.

On an organic basis, its revenue grew 35% year over year in the first quarter of 2022 after excluding its revenue from Zipwhip. But for the second quarter, it expects its reported revenue to grow just 36%-38% year over year, and for its organic revenue to increase 27%-29% -- its slowest organic growth rate in five quarters.

Twilio's growth rates are still high, but it previously guided for more than 30% organic revenue growth through 2024. CEO Jeff Lawson reiterated that long-term goal during the first-quarter conference call, even though its second-quarter guidance fell short of the 30% mark.

COO Khozema Shipchandler attributed that slowdown to difficult year-over-year comparisons to its growth in the first half of 2021 but said the company would "see a more favorable set of comparisons" in the second half. Based on those expectations, Shipchandler said the company still feels "good about 30% for the year," as well as the following two years.

But Twilio still has some fundamental problems

If Twilio can grow its organic revenue by more than 30% over the following three years, then its stock still looks cheap at five times this year's sales.

However, the abrupt resignation of Twilio's chief revenue officer, Marc Boroditsky, which was announced during its first-quarter earnings report, raises some additional concerns about that optimistic long-term target.

If we look under the hood, we'll spot two other weaknesses. First, Twilio's dollar-based net expansion rate (DBNER), which gauges its revenue growth per existing customer, has steadily declined over the past year. It will probably need to gain more active accounts to offset that slowdown.

Second, its adjusted gross margins have been declining. That compression can be attributed to new wireless fees that are now charged whenever third-party applications access a carrier's network, as well as a higher mix of lower-margin international revenue. Competition from MessageBird, Nexmo, and Bandwidth could also be limiting Twilio's pricing power.

Metric

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

DBNER

133%

135%

131%

131%

127%

Gross margin*

55%

54%

54%

51%

53%

Data source: Twilio. *Adjusted (Non-GAAP) basis.

Twilio still claims it can expand its adjusted gross margin above 60% over the long term, but that could be difficult to achieve as its growth in active accounts and DBNER cools off.

It also believes it can achieve annual operating profits, on a non-generally accepted accounting principles (GAAP) basis, starting in 2023.

But the GAAP numbers are still ugly: Its net loss widened from $491 million in 2020 to $950 million in 2021, then widened again from $207 million to $222 million in the first quarter of 2022. The main culprit was its stock-based compensation, which consumed 17% of its revenue during the quarter.

Is it the right time to buy Twilio?

Twilio faces some near-term challenges, but I believe its downside potential is limited at these levels. Its insiders have also bought seven times more shares than they sold over the past three months -- which is an encouraging sign in this challenging environment for unprofitable tech companies.

If Twilio stabilizes its organic growth and gross margins in the second half of the year, I'd expect it to command a higher price-to-sales ratio again. Therefore, I think investors can nibble on this stock at these levels -- as long as they can stomach all the near-term volatility.