Twilio's (TWLO -1.13%) progress toward recovery after the conclusion of 2022 has been erased. Shares of the cloud-based communications company are down 3% so far in 2023, undoing what was a 50% rally earlier this year.  

Some investors have already saddled up for what will be a very long journey to recovery, but the recent stock performance is nonetheless discouraging -- especially given that Twilio did report some positive financial progress in its first quarter. Is there any value left here, or is it time to dump this stock and move on? 

Mr. Market pulls out its magnifying glass once again

Twilio reported revenue of $1.01 billion in the first quarter, up 15% from the year prior and near the high end of guidance provided three months ago. Adjusted income from operations was $104 million, beating guidance for as much as $55 million.

But as has been the case for nearly two years now, the market turned its attention to Twilio's runaway employee stock-based compensation (SBC) -- when a company issues new stock to employees and management in lieu of a cash paycheck. SBC was $171 million in the first quarter, including restructuring and layoffs (more on that in a moment), up from $155 million last year.

Twilio is also expected to reach positive free cash flow (FCF) for full-year 2023, but that metric didn't get off to a very good start, either. FCF was negative $108 million in the quarter.

The upshot here is that Twilio has deep pockets, and opted to initiate a $1 billion share repurchase plan last quarter to offset shareholder dilution from SBC. Approximately $115 million in stock was bought back in the first quarter, bringing the total to $250 million as of Twilio's last earnings call.

Twilio had said it will buy back $500 million within the first six months of the repurchase program being announced, while the other $500 million can be repurchased through the end of 2024.  

At the end of March, Twilio still had over $3.9 billion in cash and short-term investments, $684 million in equity investments, and debt of $988 million.  

Three reasons growth is stalling

The other bit of bad news was the outlook for stalling revenue growth. In the second quarter, Twilio says revenue will grow just 4% to 5% over the year prior. Three reasons were given for this:

  • A tough macroeconomic environment in which customers take longer to close on a new deal for software.
  • The crypto craze was still in full swing last spring, and now, that business is mostly gone for Twilio.
  • The company laid off a huge chunk of its workforce, leaving it with 6,766 workers at the end of March versus 8,156 at the end of December 2022. Software engineer and sales talent needs to be retooled following such a dramatic slash.

In other news from last quarter, Twilio is selling its Internet of Things (IoT) business, which accounts for anywhere from $5 million to $9 million in sales (according to chief financial officer Aidan Viggiano). The buyer is tiny IoT services start-up KORE Group Holdings (NYSE: KORE), and Twilio is getting about an 11.5% equity stake in the business, worth about $12.5 million based on KORE's market cap as of this writing. File it under "moonshot bets" in Twilio's sizable equity investment portfolio.

Is Twilio worth buying?

Twilio was never going to be a quick fix, given how much it was doling out in SBC and how high expenses had gotten in 2021 and 2022. A little progress was made this quarter, but there's still a long way to go. 

If you're keeping tabs on its progress, through 2025 to 2027 (or two to four years from now), Twilio expects to have averaged revenue growth of 15% to 25% and expects adjusted operating-profit margins to increase about 300 to 400 basis points a year. At the low end of guidance for this year, Twilio is expecting $275 million in adjusted operating income, or a roughly 6% to 7% adjusted operating margin -- so by 2025, Twilio should be hitting at least 12% adjusted operating margins. The business should also be FCF positive by then, which can be plowed back into stock buybacks to prevent shareholder dilution.  

If you believe Twilio can reach those goals, there could be lots of value in owning this cloud communications stock. But it's going to be a very bumpy road to recovery, as the last five months have highlighted. If you invest at all, keep this a small position as part of a basket of high-risk but potentially high-reward stocks that might pay off handsomely five years from now.