Investors who focus on the tech sector haven't had an easy 2022 thus far. While the Dow Jones Industrial Average is down only 14.6% year to date, and the broad S&P 500 is down 19.9%, the tech-heavy Nasdaq Composite index has fallen a painful 28.6%.
Plenty of individual tech stocks have fallen even further, among them Twilio (TWLO -0.55%). Shares of the business-to-consumer communications platform are down a staggering 65.5% in 2022. That said, this stock looks to me like a screaming buy today.
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Why this leader looks so appealing
Business-to-consumer engagement is crucial for businesses. Not only do firms want to communicate with their customers because it helps them find holes and issues in their products, but it also helps them build customer loyalty and drive adoption. In a study by Twilio, companies that invested in digital customer engagement over the past two years saw a 70% average top-line increase.
Twilio's platform enables these communications. According to IDC MarketScape, it is far and away the leader in the space. This might be because the company's wide-reaching toolkit allows businesses to build and deliver unique consumer experiences, and its data platform helps businesses develop personalized messaging for customers. Additionally, its platform can power the most intensive applications, yet it is simple enough to be used by any developer.
The simplicity and scale of its all-in-one offering have attracted big-name clients like Twitter and Salesforce. As a result, the company grew first-quarter revenue 48% to $875 million.
Why now?
The company looks attractive now for three big reasons. First, organic growth has been a big concern for investors over the past few years, but Twilio announced in its first-quarter report that it remains on track to achieve 30% organic annual growth through 2024. Twilio is an acquisitive company, so it is critical to ensure that its purchases of smaller tech companies only supplement its organic expansion. With its core business expected to maintain its momentum, this shouldn't be a problem.
Additionally, while Twilio has over $5.2 billion in cash and securities on the balance sheet, its losses were becoming worrisome given the company's current scale. However, in the latest report, management made it clear it expects to reach annual profitability on a non-GAAP operating basis starting in 2023. That would be a marked improvement as the company currently sports a trailing 12-month operating loss of $936 million.
The issues around its organic growth and its profitability are the two biggest risks with Twilio, so these announcements are significant green flags. On top of this, Twilio is trading at a bargain level of just 5.5 times sales, its lowest valuation since early 2018.
How could Twilio talk its way into success?
Twilio is playing in a large pond. Mordor Intelligence forecasts the communications platform industry will be worth $26 billion globally by 2026, up from less than $5 billion in 2020. As the dominant platform with a gold-standard product, Twilio can capitalize on this opportunity. And only 35% of its revenue comes from international markets, so it has a great deal of room to expand globally. In the first quarter of 2021, 29% of its revenue came from international sources, so Twilio has already been making progress, and there is still plenty of foreign business to capture.
What to watch
To become a winning investment, Twilio will have to jump some hurdles, but they're small ones. It will be a good sign if Twilio lives up to its guidance and delivers stable organic growth while reaching non-GAAP operating profitability next year.
Additionally, sustained adoption from new customers would also validate its leadership in the industry. The main risk is competition, so seeing Twilio maintain its dominant position and reputation is critical. If this were to change, it would likely show up through slowing customer growth and higher churn rates.
Twilio has shown investors it can execute while mitigating its risks over time. However, its shares have continued to drop to historically low levels. This combination of a cheap share price and continued de-risking has made the company extremely attractive. Investors don't want to miss out on the opportunity to buy this stock and hold it for the long haul.
