Improvements in communication have been one of the most important aspects of technological innovation over the past century. During the COVID-19 pandemic, communication technology was even more critical, as many people were forced to work from home or reduced their in-person contact. This catalyst boosted two stocks, Zoom Video Communications (ZM 1.40%) and Twilio (TWLO 0.70%), and sent them soaring.
After the hype surrounding these two stocks eased, they were heavily sold off, despite continued business gains. I believe the market has swung too far in the bearish direction for these two, and long-term investors should use the current sentiment to their advantage to pick up these stocks at a discount.
1. Zoom Video Communications
Zoom, of course, is the video conferencing software that allows businesses to conduct meetings and friends to attend virtual happy hours. While many businesses have required their workers to return to the office and those happy hours now occur in person, Zoom's products have become integrated into many daily business functions.
If businesses had no use for the software, they wouldn't be renewing their Zoom subscriptions. Zoom's current remaining performance obligations (RPO) -- the portion of contract revenue it expects to realize over the next 12 months -- rose 25% year over year during its fiscal 2023 first quarter (ending April 30). This growth indicates strong renewal rates, a great sign for investors. Zoom also grew its enterprise customer count 24% year over year to nearly 200,000.
This expansion helped drive quarterly revenue growth of 12% to $1.07 billion. However, earnings per share were down 50% year over year due to higher sales and marketing expenses. Still, Zoom Video trades at an attractive 26 times earnings.
For future products, Zoom has been promoting its Zoom phone, which gives businesses voice over internet protocol (VoIP) access to power office phones and reached 3 million seats this quarter. New offerings will be critical for future growth, and with the launch of Zoom One -- a new meeting technology -- it's doing just that.
Despite its huge business boom in 2020 and 2021, Zoom stock is still worth buying. While it may be a while before it recovers from the 81% drop from its all-time high, I'm confident that the business can produce great enough returns to justify owning the stock.
Twilio is much more behind the scenes than Zoom Video. If you've ever interacted with a business to confirm an appointment through text or received promotional emails, you've likely experienced Twilio's product already. Twilio's APIs (application program interfaces) facilitate setting up the code necessary to send out text messages, set up a customer support video call, send promotional emails, and program automated phone calls.
Once a company goes down the route of setting up these programs, it's difficult for them to leave. Additionally, Twilio's pay-as-you-go model has helped its expansion rate remain high at 127% during Q1. This metric means customers spent $127 for every $100 they spent last year. This expansion helped power year-over-year revenue growth of 48%, or 35% if organic revenue is examined (organic revenue excludes acquisitions made after Jan. 1, 2021).
Twilio's management sees a bright future for the company, with CEO and co-founder Jeff Lawson projecting at least 30% annual organic revenue growth through 2024. Additionally, it expects to turn an operating profit starting in 2023, providing shareholders with long-awaited profits.
Because Twilio doesn't have any profits yet, its valuation should be examined from a price-to-sales (P/S) standpoint. With the stock trading just under five times sales, Twilio has reached the lowest valuation point in its history as a public company (it IPOed in 2016).
The use case of Twilio's product is far too wide to be bearish on this stock. However, with solid growth ahead and a dirt cheap valuation, investors would be wise to grab this stock while it's down 80% from its all-time high.
Both Twilio and Zoom Video are still fueling communication worldwide. The demand for their products hasn't eased, and while growth won't be as easy to come by as it was during 2020 or 2021, there is enough opportunity available to establish a position in these stocks.