Twilio (TWLO 1.47%) and Zoom Video Communications (ZM 1.57%) both make it easier to communicate across the internet with their cloud-based platforms. Twilio's platform processes text messages, voice calls, videos, and verification features for mobile apps. Zoom's brand became synonymous with video calls during the pandemic.
Both stocks attracted a stampede of bulls during the buying frenzy in growth and meme stocks throughout late 2020 and 2021. However, both were crushed in 2022 as rising interest rates drove investors toward more conservative investments. As a result, Twilio and Zoom now both trade about 90% below their all-time highs.
Should investors buy either of these fallen tech stocks before a new bull market starts? Let's take a look.
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Twilio's slowdown isn't over yet
Twilio's revenue expanded at a compound annual growth rate (CAGR) of 59% between 2016 and 2020. Some of that growth was driven by acquisitions, but the company declared it could grow its organic revenue by at least 30% through 2024 during its investor day presentation in October 2020.
On an organic basis, Twilio's revenue rose 42% in 2021 and 30% in 2022. But its organic revenue only grew 15% year over year in the first quarter of 2023 and climbed a mere 10% in the second quarter. That slowdown drove Twilio to abandon its target of 30% organic growth, and it now expects just 3% to 4% organic growth in the third quarter.
For the full year, analysts expect Twilio's revenue to rise just 6%. That slowdown is a result of macro headwinds, which drove many companies to rein in their spending, but competition from similar cloud-based communications platforms like MessageBird, Plivo, Ericsson's Nexmo, and Bandwidth could be exacerbating its slowdown.
At the same time, rising carrier fees -- which telecom companies now increasingly charge third-party apps for accessing their networks -- continue to compress Twilio's gross margins.
On the bright side, its adjusted operating margins turned positive again over the past three quarters as it laid off thousands of employees and streamlined its spending. As a result, analysts expect it to turn profitable again on an adjusted basis this year.
Twilio also bought back $500 million in shares since it authorized a $1 billion buyback plan this February, and its insiders have bought 25 times as many shares as they sold over the past 12 months. During its latest conference call, CEO Jeff Lawson predicted its revenue growth "will reaccelerate during 2024" as the macro environment gradually improves.
Zoom also faces tough headwinds
Zoom's revenue surged 326% in fiscal 2021 (which ended in January 2021) as the pandemic drove more people to take online classes, work remotely, and make video calls to their friends and family members. Its catchy brand, simple interface, and freemium model made it an attractive alternative to enterprise-oriented video-conferencing platforms like Cisco's Webex.
Zoom's revenue grew another 55% in fiscal 2022 but rose a mere 7% in fiscal 2023. It expects that slowdown to deepen with just 2% growth in fiscal 2024. Zoom's growth stalled out as the pandemic passed, people used video conferencing services less frequently, and aggressive competitors like Microsoft Teams, Alphabet's Google Meet, and Meta's Facebook Messenger carved up the fragmented market.
The company tried to acquire the cloud-based call center provider Five9 in 2021 to diversify its business, widen its moat, and brace for the post-pandemic slowdown, but that deal ultimately fell through.
Zoom expects the expansion of its Virtual Agent and Contact Center services, along with new AI features for summarizing and organizing meetings, to stabilize its long-term growth. It's also cutting costs to expand its operating margins, laying off 15% of its workers earlier this year, and it expects adjusted EPS to grow 6% to 7% in fiscal 2024 -- which would represent an improvement from its 14% decline in fiscal 2023.
Zoom notably bought back $1 billion in shares in fiscal 2023, but its insiders still sold nearly four times as many shares as they bought over the past 12 months. That chilly insider sentiment suggests its grueling slowdown isn't over yet.
The valuations and verdict
Both stocks look a lot cheaper than they did during the peak of the growth stock rally. Twilio trades at 26 times forward earnings and 2.5 times this year's sales, while Zoom trades at 15 times forward earnings and 4.4 times this year's sales.
I wouldn't rush to buy either of these out-of-favor stocks when other promising stocks are still on sale. But if I had to choose one, I'd pick Twilio because it is still growing faster, enjoys a wider moat, and has a clearer path toward a long-term recovery.
