Shareholders in cloud-based communications management platform Twilio (TWLO 0.60%) have had it tough over the past 18 months with share prices down about 83% from highs set in February 2021. The company went public six years ago but is still burning cash, and Wall Street appears to be tired of waiting for profits.
But a change in stock price performance could be on the way if management's reporting earlier this month about changes to the company's financials hold true over the next year. Let's take a look at why Twilio's profitability struggles are overblown, what management is trying to accomplish, and why the stock could be a great investment idea at today's price.
Investing in the business
Twilio's business started as a cloud-based customer engagement platform; businesses can use the company's software application programming interface (API) to embed communications features like talk, text, and video into websites and mobile apps.
But Twilio has expanded its business, fleshing out new products like Flex, which builds cloud-based contact centers for companies, and Engage, which helps build personalized marketing campaigns. Twilio wants to touch every way that a business interacts with its customers.
But innovation isn't free; Twilio has significantly ramped up its employee headcount and spending on research and development over the past two years. That includes people it brought over when it acquired Segment for $3.2 billion in late 2020.
TWLO Total Employees (Annual) data by YCharts.
Twilio is now doing nearly a billion dollars in quarterly revenue and serves more than 275,000 active customers. New products like Flex and Engage will help Twilio cross-sell its customer base and support its 123% net dollar expansion rate, which indicates how much customers are increasing their spending with Twilio. It may become harder to grow 40% to 50% year over year as the company's revenue base grows larger, but Twilio is positioning itself for sustained growth over the long term.
Cash to support its efforts
While Wall Street might be sweating Twilio's lack of profitability, investors shouldn't rush to hit the panic button. The company still burned through $253 million over the past year but has a whopping $4.4 billion cash balance and just $987 million in debt. In other words, Twilio can operate this way for a long time and still not need any new cash on its balance sheet.
TWLO Free Cash Flow data by YCharts.
Meanwhile, CEO Jeff Lawson intends to work the business toward turning a profit, targeting non-GAAP (adjusted) operating profitability next year. Investors will find out if Lawson delivers on this goal, but it's clear today that the business isn't having financial problems.
Wall Street is leaving Twilio to the wolves
The market hasn't been kind to shares of Twilio; the stock's not only lost more than 80% of its value from the peak, but the valuation, looking at the price-to-sales ratio (P/S), has fallen to its lowest level ever! The market's sentiment toward Twilio is so poor that one might ask if bankruptcy is on the table.
TWLO PS Ratio data by YCharts.
But this isn't realistic because of how much cash Twilio has. Sometimes the stock market is irrational; it can be a popularity contest in the short term, when meme stocks get snapped up, and quality businesses like Twilio are forgotten.
While the stock's valuation is lower than ever, Twilio the business is generating more revenue, serving more customers, and has more products and services than ever. No investment is a sure thing, but one has to like this illogical mismatch between share price and business performance as an intriguing opportunity worthy of consideration.
Ultimately, Twilio provides a vital service to more than a quarter million businesses worldwide, and the strong cash position shouts that the business isn't going away anytime soon. The stock could go from being a dog to a winner if Wall Street begins appreciating that.
