1 Reason to Buy Twilio Stock, and 1 Reason to Sell

Few stocks have been more emblematic of the boom and bust of the market over the past few years than Twilio (TWLO 1.25%). The cloud communication platform's stock rocketed to $443 in early 2021, only to fall more than 90% by late 2022. After a better start to 2023, Twilio trades for $66 as of this writing.

Stock market sentiment aside, there were business reasons for the rise and fall of the stock, even if those movements were exaggerated. Investors considering buying or selling Twilio stock today should consider the future potential of the business. Let's take a look at one reason to buy Twilio stock and one reason to sell.

Reason to buy: A path to profitability

In 2020 and 2021, the story of each quarter was the same: Revenue and customer growth were impressive, while the company remained unprofitable. As the calendar changed to 2022, the profitability trends worsened, and the company began burning cash. This trend, along with the bear market, led to the 90% drawdown in Twilio's stock price.

In September, Twilio announced a layoff of 11% of its workforce and followed that up recently with an additional 17% reduction. These reductions in Twilio's workforce were part of several changes the company made in order to transition from a growth company to a profitable growth company. According to management, Twilio expects to be generally accepted accounting principles (GAAP) profitable by the fiscal year 2027.

In the recently reported Q4 2022 earnings, there was evidence that this pivot toward profitability is starting to take shape. Twilio reported a net loss of $229 million for the quarter. While that's not necessarily a reason to celebrate, it was a big improvement over the $291 million loss posted in Q4 of 2021 and the $482 million loss one quarter ago.

Many companies are unprofitable because they choose to be so, in order to grow as fast as possible. Other companies are unprofitable because they have no choice. If Twilio can meet its GAAP profitability target by 2027, it would suggest the company is the former rather than the latter.

Reason to sell: Slowing growth

Twilio's revenue and customer metrics continue to grow each quarter, but that growth rate is slowing. As an example, annual revenue has grown at a 57% compound annual growth rate (CAGR) since 2017, but year-over-year growth has slowed from 75% in 2019 to 35% in 2022.

The growth trend is also slowing with active customers. To be clear, 13% customer growth isn't anything to be ashamed of, but investors should watch to ensure this downward trend doesn't continue.

Data source: Twilio

Also worth keeping an eye on is Twilio's dollar-based net expansion rate. Put simply, this is a measure of how much current customers are spending this year compared to last year. Two years ago, this metric was at 139%, but in the most recent quarter, it slowed to 110%. Again, the fact that customers spend more each year is a positive indicator, but the trend is worth watching.

So what should investors think about Twilio?

For years, Wall Street has been waiting for Twilio to turn toward profitability, and it appears the company is at the beginning of that journey. However, if revenue and customer growth continue to slow, meeting management's profitability target is going to be more difficult. 

An investment in Twilio today is a bet that brighter days are ahead and that the slowing growth isn't a trend but rather a bump in the road. However, for those skeptical of Twilio's ability to continue toward profitability while reversing the growth trends, now may be a time to sell.