Technology stocks have been on fire in 2023 thanks to cooling inflation, strong economic activity, and the robust jobs market.
The Nasdaq-100 Technology Sector index has risen an impressive 40% as a result, outpacing the S&P 500's rise of 16% by a significant margin. Wall Street believes we are in the middle of a bull market already, as the S&P 500 has risen more than 21% since hitting a low on Oct. 12, 2022.
It wouldn't be surprising to see tech stocks continue their solid rally, and that's good news for celebrated investor Cathie Wood. As the founder and CEO of investment management firm ARK Invest, Wood is well-known for making big bets on companies capable of disrupting the industries they operate in.
Wood's ARK Innovation ETF has already benefited from the favorable market in 2023 with a gain of 40% year to date. Twilio (TWLO 1.47%) is the eighth-largest holding in this exchange-traded fund, and Ark Invest continues to regularly add to its position in this cloud stock. It's still trading at an attractive valuation despite gaining 34% so far this year. Let's look at the reasons investors shouldn't miss this opportunity.
Twilio's rapid growth makes the stock a no-brainer
Twilio released its second-quarter results last month. Revenue was up 10% year over year to $1.04 billion, thanks to the growth of its customer base as well as a slight jump in spending from its existing customers.
Twilio ended the quarter with about 304,000 active customer accounts versus 275,000 a year ago. Its dollar-based net retention rate, which compares the spending of its customers in a quarter to the spending from those same customers in the year-ago period, was 103%. A reading of more than 100% in this metric means the company's existing customers adopted more of its offerings or increased their use of them.
More importantly, adjusted earnings jumped to $0.54 per share from a net loss of $0.11 in the year-ago period, driven by the company's focus on reducing costs. It expects this solid bottom-line growth to continue in the current quarter with $0.35 per share in earnings at the midpoint of its guidance range.
Analysts expect the company to finish the year with $1.72 per share in earnings as compared to a loss of $0.15 in 2022. This bottom-line momentum should extend into 2024 and 2025 as well.
Data by YCharts.
Investors can expect the stock to soar big time
The cloud-based contact center market was worth an estimated $17 billion in 2022 and could hit annual revenue of $69 billion in 2027, according to Mordor Intelligence. That's a market expanding at a compound annual growth rate (CAGR) of 26%.
Twilio's 2022 revenue of $3.83 billion implies that it controls 22% of this market. Assuming it can maintain this approximately 20% market share over the next several years, annual revenue could jump to almost $14 billion.
The stock currently trades at a price-to-sales ratio of 3. Carrying that forward and combining it with the revenue outlook above, the company's market cap could reach $42 billion. That represents a 250% gain from current levels.
The company is also integrating artificial intelligence (AI) into its solutions to widen its customer base. Twilio recently launched CustomerAI, a platform that uses predictive and generative AI tools to help companies improve their customer service.
With the use of generative AI in the customer-service market expected to see a 24% CAGR over the next decade, Twilio is pulling the right levers to make the most of its end-market opportunity.
Investors could do well buying this Ark-approved holding while it's still trading 85% below its all-time high. Such a bargain may not be available much longer given Twilio's opportunities for long-term growth.
