Twilio (TWLO -1.59%) is one of Cathie Wood's top 10 holdings, with the cloud communications specialist accounting for just over 4% of the Ark Invest CEO's popular Ark Innovation ETF, but the celebrated investor's bet on this fast-growing technology company has gone south in 2022.
Shares of Twilio are down 83% so far this year. The stock received a knockout blow recently and fell over 34% in a single day after the company released third-quarter 2022 results on Nov. 3. Though Twilio delivered impressive year-over-year growth in Q3, management's warning that it won't be able to sustain the pace set the cat among the pigeons.
The company's guidance fell short of what Wall Street was looking for, and investors were quick to press the panic button. But investors looking to buy a potential long-term winner on the cheap can consider treating Twilio's big drop as a buying opportunity. Here's why.
Twilio is delivering robust growth despite headwinds
Twilio's third-quarter revenue of $983 million was up 33% over the prior-year period. The solid top-line increase was driven by a bigger customer base and a larger share of customers' wallets. More specifically, Twilio had 280,000 active customer accounts at the end of Q3, up from 250,000 at the end of the year-ago period.
The company's dollar-based net expansion rate was also impressive at 122% last quarter. Twilio points out that the metric measures its "ability to drive growth and generate incremental revenue" from customers.
The dollar-based net expansion rate increases when its active customers increase their use of the company's solutions or adopt new offerings. Twilio compares the spending by its active customer base in a quarter to the amount spent by the same customer cohort in the prior-year period.
A reading above 100% means that Twilio is driving incremental revenue growth from its existing customer base by cross-selling its services.
In all, Twilio turned in a solid top-line performance in Q3 that helped it beat the consensus estimate of $972 million. The company's adjusted loss of $0.27 per share was also smaller than Wall Street's estimate of a loss of $0.36 per share.
But it was the guidance that sent the alarm bells ringing for Twilio investors.
The company anticipates $1 billion in revenue in the current quarter, which would be an increase of 18.5% over the prior year. Analysts, however, were looking for $1.07 billion in revenue from Twilio in the fourth quarter. What's more, the company's estimate of a loss of $0.11 per share to $0.06 per share was better than Wall Street's expectation for a loss of $0.12 per share.
The guidance doesn't seem too bad at first since Twilio expects to clock robust revenue growth amid macroeconomic headwinds. But COO Khozema Shipchandler points out that the company isn't immune to the macro environment that's negatively impacting its business right now. Twilio says that it won't be able to meet its target of delivering 30% annual revenue growth that it had set a couple of years ago.
Shipchandler, however, is still optimistic about the company's long-term growth, adding on the earnings conference call, "We still believe we'll deliver attractive levels of growth going forward, but in the current market, we don't believe 30% plus is achievable."
Savvy investors should focus on the bigger picture
Twilio's Q4 guidance suggests that it will finish 2022 with a 29% increase in revenue. While that's lower than management's 30% target, it is still respectable. Twilio management's comments on the latest earnings call suggest that 2023 could be a difficult year for the company and its growth could remain muted if customer spending drops in case of a recession.
But at the same time, investors shouldn't forget that Twilio is operating in a space that's set for secular long-term growth. The demand for communications platform-as-a-service (CPaaS) is expected to increase at an annual pace of 28% through 2029, with the market expected to generate annual revenue of $62 billion at the end of the forecast period.
For comparison, the CPaaS market is expected to generate $11 billion in revenue this year, which means that Twilio will be controlling a third of this market in 2022 based on its estimated revenue of $3.66 billion this year.
The impressive growth in Twilio's customer base and its ability to drive incremental spending indicate that the company could sustain its solid share of the CPaaS market in the long run and substantially grow its top and bottom lines. This explains why analysts are anticipating healthy top-line growth from Twilio.
TWLO Revenue Estimates for Current Fiscal Year data by YCharts.
As such, this Cathie Wood favorite looks like a solid bargain following its latest pummeling on the market. Twilio stock is now trading at just 2.2 times sales, which is a big discount to its five-year average of 16.6.
So, investors are getting a sweet deal on this cloud stock that's still growing nicely despite challenges, and more importantly, it seems capable of delivering healthy long-term gains considering the big end-market opportunity it is sitting on.
