Is Twilio Stock a Buy Now?

Twilio's (TWLO 0.88%) stock surged 12% during after-hours trading on Feb. 15 following its fourth-quarter earnings report. The cloud-based communication software provider's revenue rose 22% year over year to $1.02 billion, which beat analysts' estimates by $20 million. On an organic basis, which excludes its recent acquisitions, its revenue rose 21%.

On the bottom line, Twilio posted an adjusted net profit of $41 million, compared to its net loss of $36 million a year earlier, as its adjusted earnings of $0.22 per share easily cleared the consensus forecast by $0.30. On a generally accepted accounting principles (GAAP) basis, its net loss narrowed from $291 million to $229 million.

Image source: Getty Images.

For the full year, Twilio's revenue rose 35% to $3.83 billion, cooling from its 61% growth in 2021. Its adjusted net loss narrowed from $43 million to $27 million, but its GAAP net loss widened from $950 million to $1.26 billion.

Twilio is still growing, but should you buy its stock after its latest rally?

Twilio's growth continues to decelerate

If you've ever contacted a Lyft driver or Airbnb host directly through their mobile apps, you've used Twilio's services. Twilio's cloud-based platform works behind the scenes and enables developers to easily integrate calls, text messages, and other communication features into their apps with just a few lines of code. That's a lot easier than building those features from scratch, which can be buggy and difficult to scale as an app gains more users. Twilio offers its services though a flexible usage-based model, which only charges its customers for the services they use, instead of restrictive subscriptions.

Twilio's early mover's advantage in this niche market initially enabled it to grow like a weed. But over the past year, its growth in active accounts and organic revenue cooled off as its dollar-based net expansion rate (DBNER) -- or its year-over-year growth per existing customer -- declined.

Data source: Twilio. YOY = Year over year.

During its investor day presentation in 2020, Twilio boldly claimed it could grow its organic revenue by at least 30% annually through 2024. But last November, it pulled that guidance in response to its recent challenges.

Those challenges include a tough macro environment, which is delaying big software deals, and the soft usage of apps across the crypto, consumer on-demand, social, retail, and e-commerce markets. It also faces tough competition from aggressive rivals like MessageBird, Bandwidth, and Ericsson's Vonage.

To make matters worse, Twilio and its peers have been squeezed by higher carrier fees -- which are charged by telecom companies whenever external apps access their mobile networks -- over the past year. Those fees, along with the macro and competitive headwinds that are eroding its pricing power, reduced Twilio's adjusted gross margin from 53% in 2021 to 51% in 2022. Its adjusted operating margin also turned negative for the full year.

Twilio braces for more headwinds this year

Twilio laid off 11% of its workforce last year to counter that pressure, and it plans to lay off another 17% of its remaining employees this year. But it also launched a new $1 billion buyback plan, which is presumably aimed at offsetting the dilution from its stock-based compensation (which consumed 21% of its revenue in 2022) instead of boosting its earnings per share (EPS).

For the first quarter, Twilio expects its revenue to rise 14% to 15% year over year, which misses analysts' expectations of 17% growth. But it also expects to post an adjusted EPS of $0.18 to $0.22, compared to its break-even EPS a year ago and the consensus forecast of a penny per share. For the full year, analysts expect Twilio's revenue to rise 17% to $4.4 billion as it returns to non-GAAP profitability with an adjusted EPS of $0.23.

With its current enterprise value of about $9 billion, Twilio is valued at just over 2 times this year's sales. That makes it dirt cheap compared to other cloud-based communications stocks like Salesforce, which is growing at a similar rate but trades at 5 times this year's sales; and Five9, which is growing more slowly than Twilio but trades at 6 times its 2023 sales estimate. However, Twilio could continue to trade at that discount to its peers as long as its organic revenue is decelerating, its DBNER is shrinking, and its gross margin is being compressed by higher carrier fees.

Twilio expects all three headwinds to persist throughout 2023, and it will mainly focus on cutting costs to counter that pressure. Therefore, Twilio's upside potential might be limited over the next few quarters. I wouldn't rush to buy more shares when plenty of other high-quality tech stocks are still on sale.