Once a darling of investors, Twilio (TWLO 1.47%) has been on a wild ride over the past few years. Shares traded for around $120 at the beginning of 2020, rose to a high of $443 at the beginning of 2021, and then fell to a low of $41 in late 2022. Even after a mild recovery this year to around $68, the stock recently was still down 84% from its 2021 high.
That said, Twilio still has a lot of promise, and it offers a product that many well-known businesses use. If you've ever chatted in an app or on a webpage, you may have interacted with Twilio's software without even noticing it. For investors who are curious about Twilio and are considering buying shares today, here are five things to know.
1. Revenue growth is slowing
During its rapid bull market run in 2020, Twilio's stock appreciation was primarily driven by its eye-popping revenue numbers. From Q2 2019 through Q2 2021, its year-over-year revenue growth never dropped below 46%, and in most quarters, it was above 60%.
However, those days are over. Since Q2 2021, when its top line grew by 67%, Twilio's revenue growth rate has fallen every quarter, bottoming out at just 15% in Q1 2023.
Nor does the bad news stop there. Guidance for the recently completed second quarter calls for revenue growth of only 4% to 5%.
2. Customers are spending less
One metric that Twilio reports is its dollar-based net expansion rate. Essentially, this indicates how much the company's average established customer is spending with it this year compared to last year.
In Q1 2021, this figure was 133%, meaning its average customer was spending 33% more than in the previous year. This metric, too, has declined over the last two years. In Q1 2023, it was 106%.
On the bright side, its customers are still spending more with it over time. Twilio's "land and expand" business model allows it to improve financial performance without spending as much on customer acquisition.
3. Stock-based compensation is slowly improving
While it's common for tech companies to use stock-based compensation to attract and keep the best talent, investors should pay attention to make sure those outlays are not egregious. Over the past five years, Twilio's stock-based compensation rose by 651%, pushing its count of shares outstanding up by 89%. That's a lot of dilution for shareholders.
In Q1 2023, stock-based compensation represented 16% of Twilio's total revenue. Management has stated that stock-based compensation will be lower in 2023 than it was in 2022, so investors should keep an eye on that over the next few quarters. The company has also set a longer-term goal of reducing stock-based compensation to where it's 10% to 12% of revenue by 2027.
4. Profitability is still a long way away
Like many of its tech sector peers, Twilio's stock posted massive gains in 2020 and 2021, powered by strong revenue and customer growth, even as it remained unprofitable. Now, though, the market is no longer willing to pay a premium for unprofitable businesses, so it's vital that Twilio work on improving its bottom line.
In Q1, Twilio posted a net loss of $342 million, compared to net losses of $222 million in the year-ago quarter and $207 million in Q1 2021. Things are not trending in the right direction.
The news is slightly better on an adjusted basis. Non-GAAP net income in Q1 was $88 million, up from $425,000 in the prior-year period. The biggest reason for this difference is that the non-GAAP metric excludes the stock-based compensation expense, highlighting just how destructive to profitability stock-based compensation can be.
Management is targeting GAAP profitability by 2027. Investors should keep an eye on these metrics over the next several quarters to see if the company makes progress on that front.
5. Twilio stock is historically cheap
In its time as a public company, Twilio has traded for an average price-to-sales ratio of 13.5. That multiple bottomed out recently at 2.1, and shares currently trade for about 3 times sales. Put another way, its shares today trade about as cheaply as they ever have.
Twilio faces a lot of headwinds as a company. It will be challenging for it to achieve profitability while revenue growth is slowing, making management's 2027 GAAP profitability goal seem like wishful thinking. However, patient investors who see potential in Twilio's product offerings might want to make a small bet on it succeeding over the long term.
If the company is able to turn things around, or even if it ends up being acquired, it's not unreasonable to think there could be some upside for investors from today's price.
