2023 has been an exciting year for the technology sector. Artificial intelligence (AI) advancements have enthusiasm rising across many different industries and use cases. As a result, several names in tech have witnessed ballooning valuations.
But one company has been quietly flying under the radar. Communications and customer engagement platform Twilio (TWLO 1.47%) has been no stranger to challenges this year. While the stock is up over 20%, it is down significantly from its highs a couple of years ago.
That said, Ark Invest CEO Cathie Wood has been an avid buyer of Twilio for the last couple of years. The technology investor has accumulated almost 7 million shares of Twilio, spread across three of her exchange-traded funds. Moreover, I believe that Wood has done a stellar job showing her support, as evidenced by consistently dollar-cost averaging into the stock throughout its volatile price movements.
During a recent discussion with CNBC, Wood doubled down on her Twilio stance, citing the company's data aggregation as a core part of her thesis. In this article I am going to review some of the recent moves Twilio has made as a business, as well as highlight its new product offering and how it ties into Wood's narrative. Investors may come away inspired to scoop up some shares in the growth stock.
Aligning with investor interests
A couple of months ago, Jim Cramer covered an interesting development with regards to Twilio during a panel discussion on CNBC. An activist investor called Legion Partners reportedly met with Twilio's leadership and called for some significant operational changes. Namely, the investor urged Twilio to take a hard look at the business and identify ways that it can operate more efficiently without sacrificing meaningful growth.
While this suggestion sounds reasonable, it's a tough needle to thread. However, even in just the last couple of months, Twilio has made a number of changes that could be the start of a new growth stage. For example, in June and July, Twilio divested two noncore assets: its Internet-of-Things (IoT) business and its India operation, ValueFirst. After selling off ancillary businesses, Twilio should be better able to focus on core products and markets.
At the end of Q1, Twilio issued revenue guidance for the second quarter of $980 million to $990 million and non-GAAP income from operations of between $65 million and $75 million. However, the actual results crushed those estimates. For the quarter ended June 30, Twilio reported revenue of $1.0 billion, and non-GAAP income from operations was $120.1 million.
Although it'll be a while before the company wins back the confidence of investors, Twilio's latest earnings showcased some of the progress it's already making.
Image source: Getty Images.
Is this secretly an AI company?
Twilio's core business is developing application programming interfaces to assist with communication between consumers and vendors. For example, if you've ever texted or called an Uber driver through the app, the underlying technology is powered via Twilio.
Per the company's latest earnings release, Twilio boasts over 300,000 active customer accounts. The large customer base combined with the company's technology signals that Twilio may be sitting on a data goldmine.
Taking this notion a step further, back in June, Twilio debuted its foray into AI with the introduction of a new product called CustomerAI. In the press release featuring the new product, the company underscored that Twilio's technology powers more than 1 trillion customer interactions annually. Simply put: That is a lot of valuable customer data. During her interview on CNBC, Wood referred to such libraries of data as the "secret sauce" that will set apart the winners of AI in the long term.
As operations begin to turn around and hype for AI continues, investors may wonder if Twilio is undervalued.
Compelling valuation for a growth stock
Twilio stock is up about 26% year to date. While this is a generous return, investors should take the time to zoom out a bit.
The top chart above shows that Twilio stock is down materially over the last three years, having cratered since its pandemic-era highs. Moreover, given the 2.8 times price-to-sales ratio, it's clear that investors have been losing faith in Twilio for quite a while.
In Q2, Twilio managed to beat its revenue guidance, generate positive free cash flow, and reduce stock-based compensation. Fellow Fool Keithen Drury recently wrote that Twilio stock trades at "dirt cheap levels."
While the graphs above may paint a gloomy picture, I believe the sell-off is overdone. The company has so far delivered on some of the call-to-action items from activist investor Legion Partners.
As demand for large language models and generative AI applications surges, Twilio may be a discounted, if not misunderstood, player. The company's renewed focus on efficient growth plus the tailwinds from AI's potential disruption to core products and services makes Twilio really tempting at current trading levels.
