Renowned investor Cathie Wood -- the founder, chief investment officer, and CEO of asset management firm Ark Invest -- is a widely followed figure on Wall Street thanks to her focus on finding disruptive companies that could change the world.
Twilio (TWLO 1.47%) is one such company that has found a place in Cathie Wood's portfolio. It is the 11th-largest holding in the ARK Innovation ETF, accounting for 4% of the fund's holdings. The fund invests in companies capable of disruptive innovation, and it is not surprising to see Twilio find a place in it given the way it is changing the contact center industry. What's more, Wood has been buying more shares of Twilio since May, taking advantage of the fact that it still sports an attractive valuation despite its solid gains in 2023.
Shares of the company have gained an impressive 25% in 2023, outpacing the S&P 500's gains of 13%. Let's look at the reasons why this cloud stock is headed higher, and why buying it is a no-brainer right now.
Twilio is disrupting a massive market
The contact center market has changed tremendously over the years. Companies used to invest a lot of money in setting up customer care centers where associates used to sit and call customers or attend to their queries. A typical contact center used to have several computers, telephones, and headsets, among other things.
Setting up and running a physical contact center was expensive, as companies had to spend on office space, incur administrative expenses, buy equipment, and pay building and utility fees, among other things. But the advent of cloud computing has changed the contact center space. A customer service associate now requires just a mobile device, an internet connection, and an application programming interface (API) from the likes of Twilio to respond to customer queries.
Not surprisingly, operating a cloud-based contact center costs just a fraction compared to a physical contact center. This explains why the cloud-based contact center market is expected to generate annual revenue of $82 billion in 2030, compared to just $14.5 billion in 2021, according to Straits Research. Market research firm IDC points out that Twilio is the top vendor of cloud-based contact center solutions, which puts the company in a solid position to make the most of the huge end-market opportunity on offer.
Twilio was sitting on a solid base of more than 300,000 active customers at the end of the first quarter of 2023, a jump of 11% over the year-ago period. It is also worth noting that Twilio's dollar-based net expansion rate stood at 106% during the quarter, which indicates that the company's existing customer base is spending more money on its solutions.
What's interesting is that Twilio managed to increase its customer count and gain a bigger share of customers' wallets at a time when it is facing a near-term slowdown on account of macroeconomic headwinds. Poor guidance sent Twilio stock tumbling following its earnings release last month. CEO Jeff Lawson pointed out on the company's May earnings conference call that management is "looking into continued headwinds," but despite that it is focused on building its sales capacity.
Twilio is doing the right thing by focusing on the bigger picture given the pace at which the industry it operates in is growing. Also, Twilio is integrating artificial intelligence (AI) into its offerings. That's not surprising considering that this technology is gaining robust traction in the customer service space. For instance, the market for AI-enabled chatbots is expected to clock 23% annual growth through the end of the decade, growing from just $5 billion in 2022 to almost $27 billion a year in 2030, as per Grand View Research.
The Twilio Studio platform allows organizations to create custom chatbots, which can then be deployed to assist customer service associates. So Twilio may be able to tap into another lucrative market. All this indicates why Twilio is expected to clock terrific earnings growth in the future.
TWLO EPS Estimates for Current Fiscal Year data by YCharts
Twilio stock is an attractive bargain
The chart above shows us that Twilio is expected to turn profitable in 2023 on a non-GAAP basis. More importantly, analysts estimate that the company can sustain impressive levels of bottom-line growth for the next five years, clocking an annual growth rate of 102%. That would be a big improvement over the company's annual bottom-line growth of 38% over the past five years.
With Twilio stock trading at 3 times sales right now, which represents a big discount to its five-year average price-to-sales ratio of 16, investors would do well to buy this cloud stock before it jumps higher.
