Where Will Twilio Be in 5 Years?

Cloud communications specialist Twilio's (TWLO 1.47%) stock rallied impressively over the past couple of months, which seems surprising as the company forecast a stark slowdown in growth in the near term.

Twilio released its first-quarter 2023 results at the beginning of May. Though the company handsomely crushed Wall Street's earnings estimate and delivered a 15% year-over-year jump in revenue to $1 billion, it expects second-quarter revenue growth to slow down to just 4% to 5%. A cutback in customer spending on account of macroeconomic headwinds is the reason why Twilio anticipates such a sharp decline in its growth rate.

Still, investors have been piling into Twilio stock, as evident by its 36% gains in the past two months. Though that may seem surprising at first, it appears savvy investors are taking advantage of Twilio's cheap valuation to accumulate shares of a company that could turn out to be a solid investment over the long run. A closer look at the market in which Twilio operates will tell us why that may be a good move.

Twilio's addressable market is on track to grow nicely over the next five years

Twilio's solutions enable companies to connect with their customers through various channels such as text, voice, email, video, and others. The company points out that its customer engagement platform is "used by hundreds of thousands of businesses and more than 10 million developers worldwide to build unique, personalized experiences for their customers."

In simpler words, Twilio provides a communications platform to companies looking to connect with their customers. The demand for such customer communications platforms is expected to grow at a terrific pace over the next five years. Mordor Intelligence estimates that the communication platform-as-a-service (CPaaS) market could be worth $47 billion in 2028. That would be a significant jump from this year's estimate of $12 billion.

So the near-term slowdown in customer spending that Twilio is seeing should not last forever. More importantly, Twilio's solid share of the CPaaS market means that it is well-positioned to take advantage of the secular growth opportunity on offer. The company is expected to generate $4 billion in revenue this year, a 7% increase over 2022. Based on Mordor Intelligence's estimate, Twilio seems set to corner a third of the CPaaS market this year.

The combination of Twilio's solid market share and the secular growth of the CPaaS market explains why the company's revenue and earnings are expected to grow at a nice clip over the next couple of years.

Source: YCharts. Twilio reported an adjusted loss of $0.15 per share in 2022, so the year-over-year growth for 2023 is not available. YOY = Year over year.

Investors can expect a nice upside over the next five years

Analysts are upbeat about Twilio's long-term prospects, as they anticipate the company's bottom line to increase at an annual rate of 102% for the next five years. That wouldn't be surprising given the company's focus on improving the efficiency of its operations and increasing its margins.

On the other hand, even if Twilio's share of the CPaaS market dips over the next five years -- let's say to 25% -- the company could still deliver healthy top-line growth. Based on Mordor Intelligence's estimate of the CPaaS market generating $47 billion in revenue in 2028, a 25% share of this market would translate into annual revenue of almost $12 billion for Twilio after five years. That translates into a compound annual growth rate (CAGR) of 24%, using the company's estimated 2023 revenue as the base.

What this means is that even if Twilio grows at a slower pace than the CPaaS market, its top line could still triple over the next five years. The company is currently trading at 3 times sales. Assuming a similar sales multiple after five years and multiplying it by Twilio's forecasted 2028 revenue of $12 billion points toward a market cap of $36 billion. That's thrice Twilio's current market cap.

So Twilio looks built for solid upside over the next five years. However, it wouldn't be surprising to see the company grow at a faster pace thanks to its focus on integrating artificial intelligence into its offerings, as that could unlock another sizable growth opportunity.

Given that Twilio stock is currently trading at an attractive sales multiple considering its five-year average price-to-sales ratio of 16, opportunistic investors are probably looking at the bigger picture and buying the stock. This may turn out to be a good move given the potential upside Twilio could deliver over the next five years.