Few companies have put investors on as much of a roller coaster as Twilio (TWLO 2.80%). From the start of 2020 to its peak in early 2021, the stock rose more than 350% before tumbling. Now, it sits 40% lower than where it entered 2020 and is more than 85% down from its all-time high. While 2023 has been a fairly strong year for most tech stocks, Twilio is barely beating the broader market, as it's only up 23% this year.

However, Twilio recently reported excellent second-quarter earnings, which could make investors rethink their stance on the stock. But is it enough to get this company going again? Let's find out.

Twilio blew away internal Q2 projections

Twilio's business focus is all about customer communication. While it's most known for its APIs (application program interfaces) that make it easy to set up text messaging systems, it also has products for marketing, customer engagement, and collecting and interpreting customer data. By creating a personalized marketing experience, Twilio states that 86% of consumers are more likely to stay loyal to that brand, giving further credence to Twilio's products.

After rapid expansion through organic growth and acquisitions over the past couple of years, Twilio's growth slowed substantially. Furthermore, because Twilio uses a consumption-based model, it's easier for clients to curtail their spending levels as they attempt to optimize their spending. So if it feels like you've received fewer automated text messages from various businesses, it's likely because they aren't using the technology as much.

This decreased usage can be directly seen in its revenue growth rate.

Chart showing Twilio's revenue falling since 2010.

TWLO Revenue (Quarterly YoY Growth) data by YCharts

Still, it's not as bad as it looks. As seen in the chart above, Twilio's Q2 revenue increased by 10% year over year. However, the guidance management gave for Q2 only indicated 4% to 5% growth.

The reason for this beat was volume stabilization, which was a concern entering the quarter. However, management continues to give ultra-conservative guidance, as it only projects 0% to 1% growth for the third quarter.

But there are two sides to a company that investors must pay attention to.

Twilio's stock is incredibly cheap

Its lack of profitability is another factor that has plagued Twilio as an investment. As a public company, Twilio never produced a penny in profits. Its profitability also got worse as it grew, which made investors about whether Twilio would ever profit.

Chart showing Twilio's net income falling from 2018 to 2022, then rising.

TWLO Net Income (Quarterly) data by YCharts

After a couple of rounds of layoffs, Twilio substantially improved its profitability. But it still has a long way to go. While management may trump its raising of non-GAAP operating income guidance for 2023, it excludes a massive part of Twilio's true operating expenses: Stock-based compensation.

In Q2, Twilio handed out $153 million in stock.While that marks a drastic decline from 2022's $242 million figure, it still is a hefty line item on the balance sheet. From a GAAP (generally accepted accounting principles) perspective, Twilio still posted a $142 million operating loss in Q2. When revenue isn't growing quickly, and the company has already trimmed most of its disposable resources, that's a problem.

As a result, investors don't place a very high price tag on Twilio's stock because they don't think it can succeed.

Chart showing Twilio's PS ratio falling since 2021.

TWLO PS Ratio data by YCharts. PS = price-to-sales.

At just 2.7 times sales, Twilio is a very cheap stock that doesn't have high expectations. But there isn't room for much downside from these levels.

Make no mistake, Twilio is a bit of a longshot investment because of its massive operating profit loss. However, because this is mostly caused by stock-based compensation (a non-cash expense), the company isn't at risk of shutting down because it is still producing positive cash flow.

So while few are expecting Twilio to succeed, it could be a great investment if it proves doubters wrong. As a result, investors could take a small position here, betting on a turnaround (this is the only reason why I still hold my Twilio shares). However, this position size should be kept fairly small, as there are other, more promising businesses than Twilio.