Twilio's (TWLO 1.08%) stock price plummeted 35% to its lowest levels in four-and-a-half years on Nov. 4 after it posted its third-quarter earnings report. The cloud-based communications software company's revenue rose 33% year over year to $983 million, which beat analysts' expectations by $11 million.
On the bottom line, it posted a non-GAAP (generally accepted accounting principles) net loss of $49 million, compared to its net profit of $2 million a year ago, but its net loss of $0.27 per share still cleared the consensus forecast by eight cents. On a GAAP basis, its net loss widened from $224 million to $482 million.
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For the fourth quarter, Twilio expects its revenue to rise just 18%-19% (in both reported and organic terms), broadly missing analysts' expectations for 27% growth. That estimate implies its revenue will rise 34% for the full year, compared to Wall Street's forecast for 36% growth. It would also represent its slowest annual growth since its IPO in 2016.
To top it all off, Twilio walked back its previous long-term goal of generating more than 30% organic revenue growth through 2024. All that uncertainty dragged down Twilio's stock, which has now declined more than 90% after closing at its all-time high last February. But could this beaten-down stock stabilize and rise again over the next 12 months?
How Twilio carved out its high-growth niche
Twilio's cloud-based platform processes integrated voice calls, text messages, authentication features, and other content for mobile apps. Instead of building those features from scratch, which can be time-consuming and difficult to scale as an app gains more users, developers simply outsource those features to Twilio with a few lines of code.
Twilio established an early mover's advantage in that innovative niche, and big customers like Lyft, Airbnb, and MercadoLibre all adopted its services. As a result, Twilio's revenue skyrocketed from $277 million in 2016 to $2.84 billion in 2021, representing a compound annual growth rate (CAGR) of 59%.
Twilio's growth impressed a lot of investors, but it was also partly driven by nine major acquisitions -- including SendGrid, Segment, and Zipwhip -- over the past six years. Those acquisitions obfuscated Twilio's underlying growth, but the company had assured investors that it could continue to grow its organic revenue by at least 30% over the next few years. That optimism, along with the broader rally in growth stocks, caused Twilio's stock to skyrocket.
Why Twilio's stock lost its momentum
Unfortunately, Twilio's growth in active accounts and revenue decelerated significantly over the past year and finally prompted it to abandon that long-term target. It attributed that ongoing slowdown to persistent macroeconomic headwinds for the cryptocurrency, consumer on-demand, social media, retail, and e-commerce sectors.
|
Metric |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|---|---|
|
Active Accounts Growth (YOY) |
20% |
16% |
14% |
15% |
12% |
|
Revenue Growth (YOY) |
65% |
54% |
48% |
41% |
33% |
Data source: Twilio. YOY = Year over year.
Twilio's dollar-based net expansion rate (DBNER), which gauges its revenue growth per existing customer, also dropped to 122% in the third quarter -- compared to 123% in the second quarter and 131% a year ago. That slowdown suggests the usage of Twilio-powered apps its gradually declining.
Its non-GAAP gross margin stayed flat sequentially at 51%, but that still represented a four-percentage-point drop from the prior-year quarter. Twilio previously claimed its non-GAAP gross margins could eventually exceed 60%, but new carrier fees -- which telecom companies now charge cloud-based services for accessing their networks -- are casting doubts on that long-term target. That compression, which was exacerbated by Twilio's big acquisitions, are causing its net losses to widen.
The next 12 months will be challenging for Twilio
During the latest conference call, chief operating officer Khozema Shipchandler declined to provide any guidance for 2023, and said Twilio would only continue to provide quarter-to-quarter forecasts "given the volatility in macro." That isn't surprising, since the current macro headwinds will likely persist into 2023 as inflation remains high, interest rates continue to rise, and geopolitical conflicts continue to disrupt enterprise spending.
Twilio's stock seems cheap at just 1.6 times next year's sales, but that valuation is pegged to analysts' estimates, which could be reduced in light of its latest guidance. But assuming that Twilio's revenue only rises 15% in 2023, its stock could still be a bargain at 2 times that estimate.
However, Twilio also needs to stabilize its DBNER and gross margins over the next few quarters to convince investors it isn't a falling knife. That could be challenging as companies rein in their spending, carriers continue to charge their margin-crushing access fees, and competing services like MessageBird, Bandwidth, and Ericsson's Vonage limit Twilio's pricing power. Its larger customers could also build their own in-house solutions to reduce their dependence on Twilio, as Uber Technologies did back in 2017.
Faced with these near-term challenges, I expect 2023 to be a rough year for Twilio as it faces slower growth and declining margins. Its downside potential might be limited, but its stock could remain dead money until it resolves its pressing issues.
