Cloud communications platform Twilio (TWLO 1.08%) has fallen 65% over the past year, ravaged by a bear market among growth and technology stocks. Dramatic price actions can cause investors to second-guess their investments -- the share price falling so much surely means something is amiss, right?
Don't get down. Markets can be a tide that lifts and lowers all ships, and Twilio's not immune to that. Here's why investors could see the stock roar back over the long term.
Why the stock might be falling
Twilio is a cloud-based customer engagement platform. More than 268,000 customers use its application programming interface (API) software to build text, voice, and video communications into web and mobile applications.
The company's growth has sped up and slowed down at times, but revenue growth has risen by at least 40% year over year each quarter since the company went public, and revenue's grown to more than $3.1 billion over the past four quarters.
TWLO Revenue (Quarterly YoY Growth) data by YCharts
However, the company went public six years ago and hasn't turned a profit yet. The bottom line has sunk further into the red since 2019. Investors sometimes overlook whether a business is profitable or not in a bull market, but can be less forgiving during hard times.
The road map to profit
Investors shouldn't assume that Twilio isn't capable of turning a profit. The company's maintained nearly breakeven free cash flow for years, and the increased spending in recent quarters follows its acquisitions of Segment for $3.2 billion in 2020 and Zipwhip for $850 million in 2021.
Twilio's expanding its business beyond its original software APIs to become a cloud-based one-stop shop for how companies interact with their customers.
Though Twilio's free cash flow turned increasingly negative, you can see below how it has plenty of cash to support its growth investments moving forward. Companies can get in trouble when they need money during tough times, but Twilio doesn't seem to have that problem.
TWLO Free Cash Flow data by YCharts
COO Khozema Shipchandler reiterated on the company's 2022 first-quarter earnings call that management expects revenue growth of at least 30% annually through 2024, and operating profit in 2023. Hitting this milestone could help instill investor confidence, though stock-based compensation could remain a talking point that investors will need to follow closely. The company's issued $650 million in compensation over the past year, about a fifth of revenue.
Historically cheap stock
Twilio's current tumble from highs is its most significant drawdown as a public company. The stock's valuation via the price to sales ratio (P/S) was well over 30 last year, but has fallen to the mid-single digits, with its current ratio of 6 near all-time lows.
TWLO PS Ratio data by YCharts
Ultimately, it seems that Twilio's years of strong growth show the company's staying power and value to its customers. Management is building out the business, chasing a larger market opportunity in broader customer engagement.
The stock-based compensation is something to watch over the long term. Still, the stock's cheap valuation in the face of solid business execution makes Twilio a seemingly favorable bet for long-term investors.
