Is Twilio Stock a Buy Now?

Twilio (TWLO 1.47%) posted its second-quarter report on Aug. 8. The cloud-based communication platform provider's revenue rose 10% year over year to $1.04 billion and beat analysts' estimates by $53 million. Its adjusted earnings per share of $0.54 cleared the consensus forecast by $0.24 and improved from its adjusted loss of $0.11 a year ago.

Twilio's stock rose slightly after that earnings beat, but it's still down nearly 30% over the past 12 months and remains almost 90% below its all-time high. Is Twilio still worth buying as a turnaround play in this unpredictable market?

Image source: Getty Images.

What happened to Twilio?

Twilio's cloud-based platform processes integrate text messages, voice calls, verification tools, and other communication features for mobile apps. Instead of building those features from scratch -- which can be time-consuming, buggy, and difficult to scale as an app gains more users -- companies like Airbnb and Lyft outsource them to Twilio with just a few lines of code. So if you've ever used Airbnb's app to contact a host or Lyft's app to message your driver, you've accessed Twilio's behind-the-scenes platform. Twilio charges usage-based fees whenever its platform is accessed.

Twilio's early mover advantage in this niche enabled it to grow like a weed after its public debut in 2016. Between 2016 and 2020, its annual revenue grew at a compound annual growth rate (CAGR) of 59%, from $277 million to $1.76 billion.

Some of that growth was driven by acquisitions. But during its investor day in Oct. 2020, Twilio declared it could grow its organic revenue by at least 30% through 2024. That ambitious long-term outlook attracted a stampede of bulls, and Twilio's stock skyrocketed to a record high of $443.49 on Feb. 18, 2021. But Twilio set the bar too high, and its stock collapsed once it became clear that it would broadly miss its lofty targets.

Another quarter of decelerating growth

Twilio's revenue rose 61% (42% organically) in 2021 but grew just 35% (30% organically) in 2022. That slowdown worsened over the past year as its revenue growth cooled off, it gained fewer active customers, and its dollar-based net expansion rate (DBNER, or its year-over-year revenue growth per existing customer) contracted. It blamed that deceleration on the macro headwinds, which drove many companies to rein in their software spending and development of new apps.

Data source: Twilio. YOY = Year-over-year.

Twilio expects that slowdown to persist with 0% to 1% revenue growth in the third quarter. On an organic basis, which excludes the divestments of its Internet of Things (IoT) unit in June and ValueFirst division in July, it expects its revenue to rise 3% to 4%. For the full year, analysts expect Twilio's revenue to only rise 6% to $4.1 billion.

But during the conference call, CEO Jeff Lawson said he was "optimistic" that Twilio's "bookings will improve toward the end of the year and that revenue growth will reaccelerate during 2024." Analysts also expect its revenue to grow 12% in 2024.

But its operating margins are still expanding

As Twilio's revenue growth cooled off, the integration of its acquisitions, tougher competition, and higher carrier fees (which telecom companies charge to access their networks) all reduced its adjusted gross margin from 56% in 2020 to 51% in 2022. But over the past year, its adjusted gross margins stabilized -- and its adjusted operating margins turned positive again after it laid off thousands of employees and executed other cost-cutting strategies.

Data source: Twilio. YOY = Year-over-year.

Twilio expects its adjusted operating margins to continue expanding in the second half of the year. It raised its full-year adjusted operating income forecast from $275 to $300 million to $350 to $400 million.

Twilio has also repurchased $500 million of its shares since its authorization of a $1 billion buyback plan in February, and it's reining in its stock-based compensation to narrow its net losses on a generally accepted accounting principles (GAAP) basis.

It narrowed its GAAP net loss year over year from $323 million to $166 million in the second quarter, and analysts expect it to narrow its net loss from $1.26 billion in 2022 to $771 million in 2023. However, those steep GAAP losses could still make Twilio an unappealing stock to own as long as interest rates stay elevated.

Is it the right time to buy Twilio?

With an enterprise value of $8.3 billion, Twilio trades at just two times this year's sales. That's a low valuation, but the bulls will likely keep shunning the stock until the macro environment improves and its revenue growth accelerates. So, for now, I wouldn't rush to buy Twilio -- especially when so many other high-quality tech stocks are still on sale.