What happened

Shares of Twilio (TWLO 0.24%) plunged as much as 45.6% this week, according to data from S&P Global Market Intelligence. The cloud communications company that helps other businesses send text messages, phone calls, and other forms of communication through application programming interfaces (APIs) posted disappointing earnings and guidance for the rest of 2022. As of 12:37 p.m. EST on Friday, the stock is down 44.7% this week.

So what

After the market closed on Nov. 3, Twilio released an update on its financials for the three months ending in September. Revenue grew 33% year over year to $983 million, and adjusted earnings per share (EPS) were a negative $0.27. Both numbers beat expectations from Wall Street analysts, who pegged the company to post $972.2 million in revenue with an adjusted loss of $0.36 per share.

There were two reasons for the stock's collapse after the report: poor guidance and a lack of profitability. Twilio has grown quickly over the years in both adoption and revenue, but it has failed to generate a positive operating profit. Last quarter, it had an operating loss of $457 million on $983 million in revenue.

Over the past 10 years, its operating margin has trended in the wrong direction. It went from around negative 15% to negative 31% over the last 12 months before this report. In 2022, investors have soured on unprofitable businesses as the Federal Reserve has raised interest rates, turning Twilio from a once-loved hypergrowth stock to something nobody wants to touch. Shares are down 85% over the past year.

On top of no profits, Twilio gave out weak guidance for the rest of 2022. It expects revenue of $995 million to $1 billion for the fourth quarter, which is below the analyst expectation of $1.07 billion. This combination of slowing revenue growth without profits is something investors do not like to see, so it is no surprise the stock is down so much this week.

Now what

Twilio has a fascinating business model, charging usage-based pricing for its communications services. This has allowed it to grow along with its business customers, providing a nice tailwind to its top line over the years. Since going public in 2016, its revenue is up almost 2,000%, making it one of the fastest-growing businesses in the world.

With the stock down in the gutter, now could be a great time to buy shares of Twilio, with the only caveat being you need to believe that the company can eventually start generating a positive operating profit. This adds some risk for shareholders, but with how much pessimism investors have for the company today, the potential reward for long-term owners is massive.