Twilio (TWLO 1.08%), a company specializing in customer communication, has had a rough year. Down over 71% year to date, the stock has lost more value than even the worst stock in the S&P 500 index. However, I think this could be an overreaction.
Driving this fall isn't business performance or a scandal. Instead, it was a stock that got too far ahead of itself. Now, the stock has swung too far in the bearish direction, and investors should consider picking up this top-tier performer before the pendulum swings in the other direction.
Communication made easy
Most people have interacted with Twilio's product without ever knowing it. If you've ever received a text on your phone to remind you of an appointment, or inform you your ride has arrived or that your flight has been delayed, chances are Twilio's product powered that text message.
Twilio's software allows users with little to no coding experience to easily write a program to interact with other systems to send out automated or manual messages. It does this through its APIs, or application program interfaces. The technology provides plug-and-play functions, so software engineers don't need to create these programs. Twilio's simplicity is part of the reason it has more than 275,000 active customer accounts, as many of those are small business owners who can't afford a software engineer or don't have the skills to write the program from the ground up.
In addition to its text messaging product, users can also build live video links, send tailored marketing emails, and set up a programable voice to make calls or direct inquiries.
To fairly charge its customers, Twilio works on a pay-as-you-go model, so you only pay for the service each time you use it. There are volume and committed-use discounts, but this pricing structure aligns the company and client, as one isn't taking advantage of the other. Overall, Twilio receives excellent customer reviews, with 4.4 stars out of five on G2 from nearly 400 reviewers.
The product offering logically makes sense, but the business behind it makes Twilio an investible idea.
Twilio's growth isn't stopping
Twilio grew its organic revenue in the second quarter (revenue excluding any acquisition made in the past 12 months) by 33% year over year. This growth continues an ongoing trend since Twilio went public -- organic revenue growth of 30% at a minimum. Although this is the lowest growth it has experienced since 2018, CEO and co-founder Jeff Lawson said in May he doesn't see this streak ending anytime soon.
From his industry outlook, he projects Twilio will deliver at least 30% annual organic revenue growth through 2024. Delivering 30% organic growth for nearly a decade is rare, but Twilio seems primed to do it.
While Twilio's top-line performance has been phenomenal, its bottom line has been less than stellar. Twilio has never produced a dollar of operating income, and the loss has only worsened lately.
TWLO Operating Income (Quarterly) data by YCharts
This chart may freak investors out about losses widening, but it shouldn't. Because Twilio has grown sales so much but kept a relatively steady operating loss margin, the company isn't in worse shape than it was in any previous year.
But the days of operating losses are coming to a close. Starting with full-year 2023 results, Lawson expects Twilio to produce non-GAAP (adjusted) operating profitability. To expedite this process, Twilio laid off about 11% of its workforce in September, signaling to investors that it is slimming down to meet this goal by trimming some unnecessary personnel.
However, this projection has a significant caveat: non-GAAP. Because Lawson used that phrase, it means Twilio isn't counting stock-based compensation in its calculation. In Q2, Twilio paid its employees just over $242 million in stock-based compensation, or about 25% of revenue. This expense will need to be outgrown or shrunk for Twilio to produce real profits, but it is a step in the right direction.
But what makes Twilio's stock a buy is its price. I'm not talking about its per-share price; instead, I'm talking about its price-to-sales valuation. After its huge sell-off, Twilio trades at about the same valuation as legacy tech companies.
TWLO PS Ratio data by YCharts
Granted, these companies are all fully profitable, but none of them are posting the revenue growth Twilio is. This valuation means there is a lot of skepticism baked into Twilio's stock, and that skepticism is a buying opportunity for me. Wall Street analysts agree, with the average price target sitting at $118.85, which implies a nearly 60% upside for Twilio's stock.
Twilio is trading like a tech company without any growth left, but that doesn't jibe with what the company projects. Nevertheless, I think Twilio is a fantastic buy at this price, and investors shouldn't hesitate to get into the stock before it reports earnings on Nov. 3.
