After a terrible 2022, the Nasdaq Composite delivered impressive returns of 29% so far in 2023, driven by a solid surge in technology stocks.
One of the main reasons why technology stocks have been in fine form this year is because of the artificial intelligence (AI) craze. The massive popularity of generative AI, triggered by the launch of ChatGPT late last year, shifted the race among tech companies to develop AI applications into high gear. That's not surprising, as the generative AI market is projected to grow at a compound annual rate of 42% over the next decade, generating $1.3 trillion in annual revenue in 2032.
Semiconductor sector bellwether Nvidia (NVDA 6.18%) has been a big early winner in this AI race. Shares of the chipmaker are up 215% in 2023 as demand for its AI chips has boomed. Nvidia's growth has simply taken off as customers have been queueing up for its top-of-the-line data center graphics processing units (GPUs) so that they can train large language models (LLMs) and offer generative AI-powered services to their customers.
Nvidia is anticipating a 170% year-over-year surge in revenue in the current quarter to $16 billion. That would be much faster than the already impressive 101% revenue growth the company enjoyed in the previous quarter. But investors who didn't buy Nvidia before its rally started would now have to pay a rich price-to-sales multiple of 34 to get into this supercharged AI play.
However, not everyone may be comfortable buying such an expensive stock despite its outstanding growth, especially considering that there have been concerns about the sustainability of the AI-driven rally. For those investors, it may be a good idea to take a look at Twilio (TWLO 1.47%) -- a stock that's not just cheap, but can take advantage of the proliferation of AI, and also has a solid core business that could help it grow at a healthy pace in the long run.
The big picture remains bright for Twilio
Twilio provides a cloud-based customer engagement platform that allows companies to connect with their customers through multiple channels, including text messages, calls, emails, video, and chats with its application programming interfaces (APIs). Twilio's solutions allow companies to replace physical customer service centers, which tend to carry higher costs of setup and operation, with cloud-based solutions.
Mordor Intelligence estimates that the cloud-based contact center market could grow at an annual pace of 22% through 2028, generating $69 billion in annual revenue at the end of the forecast period. The firm estimates that the cloud-based contact center market was worth $17 billion last year. Based on that, Twilio's 2022 revenue of $3.8 billion suggests that the company controls 22% of this space.
Assuming Twilio maintains its share of the cloud-based contact center market in the long run, it could deliver healthy top-line growth. For example, a 20% share of this market in 2028 would mean Twilio's annual revenue would jump to nearly $14 billion after five years.
However, the company is facing a near-term slowdown due to the challenging macroeconomic environment, which has led its customers to keep a lid on spending. The company's revenue was up just 10% year over year in the second quarter of 2023 to $1.04 billion. For the third quarter, Twilio is forecasting a flat top line as compared to the prior-year period, and analysts are anticipating the company to finish 2023 with just a 6% increase in revenue to $4 billion.
The good part is that Twilio is growing its sales team despite these challenges. That's not surprising considering the long-term growth opportunities in the contact center space, especially with the arrival of generative AI.
Generative AI could give Twilio a shot in the arm
Twilio management believes that the growing adoption of generative AI within the cloud communications market could help the company gain more market share. According to a survey of 500 business managers conducted by Twilio earlier this year, 92% of the respondents are using AI to enhance the experience of their customers.
Not surprisingly, Twilio has been aggressively rolling out AI-powered features to help its clients improve customer relationships and boost sales. For example, Twilio's CustomerAI Predictions tools can help marketers understand which products are likely to drive stronger sales and enable them to reach customers at the apt time on the correct channels.
Additionally, Twilio's CustomerAI Agent Assist tool is going to provide AI-recommended suggestions to customer service associates about the best actions to take while interacting with specific customers. In all, Twilio has a host of AI-powered features to help it stay on top in the contact center market. And according to Grand View Research, the adoption of AI in the contact center market could grow at a compound annual rate of 23% through the end of the decade.
Catalysts such as AI and the secular growth of the cloud-based contact center market should provide tailwinds for Twilio and help accelerate its growth. This is precisely what analysts are anticipating over the next couple of years.
TWLO EPS Estimates for Current Fiscal Year data by YCharts.
Also, Twilio is currently trading at 2.5 times sales, which is quite cheap considering its AI-related opportunity, the potential acceleration in its growth, and the fact that the S&P 500 has an average sales multiple of 2.4.
Assuming it continues to trade at 2.5 times sales after five years and hits $14 billion in annual revenue, its market cap could jump to $35 billion. That would be 3.5 times its current market cap, suggesting an upside of 250% over the next five years. So, investors looking to buy a potential AI winner at an attractive valuation should take a closer look at Twilio, as it is way cheaper than the likes of Nvidia and others poised to benefit from the AI boom.
