Twilio's (TWLO 1.47%) stock closed at a record high of $443.49 on Feb. 18, 2021. That represented a jaw-dropping 2,857% gain from its IPO price of $15 on June 23, 2016. But today, Twilio trades at about $62. Therefore, a $10,000 investment in its IPO would have blossomed to nearly $296,000 before withering back to about $41,000.
A four-bagger gain in six years isn't too bad, but Twilio still burned many investors who hopped aboard the bullish bandwagon during the peak of the meme stock rally. Let's review the bearish and bullish arguments to see if it's safe to buy Twilio again.
Image source: Getty Images.
What happened to Twilio over the past year?
Twilio's cloud-based platform handles integrated calls, text messages, videos, and security verification services for mobile apps. Instead of building those features from scratch, developers can simply outsource them to Twilio with a few lines of code. Twilio then charges those apps on a usage-based basis whenever its services are accessed.
Twilio initially grew like a weed as apps like Airbnb and Lyft integrated its communication services into their apps. Between 2016 and 2020, its annual revenue grew at a compound annual growth rate (CAGR) of 59%.
During its investor day presentation in October 2020, Twilio claimed it could grow its organic revenue by at least 30% annually through 2024. Its revenue rose 61% (42% organically) in 2021 but grew just 35% (30% organically) in 2022.
That slowdown intensified over the past year as the macro headwinds throttled its growth in active customers and reduced its dollar-based net expansion rate (DBNER) -- which gauges its year-over-year revenue growth per existing customer.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
33% |
22% |
15% |
10% |
5% |
|
Active Customer Growth (YOY) |
12% |
13% |
12% |
11% |
9% |
|
DBNER |
122% |
110% |
106% |
103% |
101% |
Data source: Twilio. YOY = Year-over-year.
What the bears will tell you about Twilio
The bears will tell you that Twilio's slowdown isn't over yet. It expects its revenue to rise a mere 1% to 2% year over year in the fourth quarter of 2023. Analysts expect its revenue to rise about 8% for the full year and grow another 8% in 2024.
During the third-quarter conference call, CFO Aidan Viggiano said it continued to "see some customers experiencing growth slowdowns and facing cost-cutting initiatives in their own businesses given the current macro environment."
The bears will also point out that Twilio faces stiff competition from similar cloud-based communication platforms like MessageBird, Bandwidth (BAND 1.46%), and Ericsson's (ERIC -1.15%) Vonage. That competitive pressure could limit its pricing power and its ability to expand its gross margins.
Twilio's authorization of a $1 billion buyback plan last February also raises red flags. That buyback might offset the stock-based compensation, which consumed 18% of its revenue last quarter, but it also implies its highest-growth days are over.
What the bulls will tell you about Twilio
On the bright side, Twilio's adjusted gross and operating margins have steadily improved over the past year.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Adjusted Gross Margin |
51% |
51% |
52% |
52% |
53% |
|
Adjusted Operating Margin |
(4%) |
3% |
10% |
12% |
13% |
Data source: Twilio. YOY = Year-over-year. *Net loss in year-ago quarter.
Twilio's rising gross margins suggest its scale is diluting its carrier fees, which telecom companies charge third-party apps for accessing their networks. Its expanding operating margins also indicate its aggressive cost-cutting measures are paying off.
Twilio also turned profitable again on an adjusted basis over the past four quarters, and it expects its adjusted EPS to jump 141% to 159% in the fourth quarter of 2023. Analysts expect it to return to profitability on an adjusted basis for the full year and for its adjusted EPS to rise 14% in 2024.
Lastly, the bulls think Twilio's stock looks cheap at just 26 times forward earnings and 2.5 times this year's sales. That's probably why it's been buying back its shares and why its insiders bought 24 times as many shares as they sold over the past 12 months.
Which argument makes more sense?
It's easy to see why Twilio disappointed so many investors, but the bearish thesis seems to be running out of steam. Its revenue growth might remain sluggish, but its expanding margins, rising profits, warming insider sentiment, and low valuations all suggest its downside potential is limited at these levels. I wouldn't rush to buy Twilio hand over fist today, but I believe it makes more sense to turn bullish on the stock than to stay bearish.
