Cathie Wood's Ark Invest is an innovation-focused asset management firm, and its portfolio is consequently packed with artificial intelligence (AI) stocks. In that context, readers may be surprised to learn that Wood and her team have been selling shares of Nvidia, Tesla, and Alphabet in recent months, three companies widely considered to be at the forefront of AI innovation.
However, Ark still has a stake in all three, so I doubt the recent sales signal a lack of conviction. Instead, Nvidia, Tesla, and Alphabet have achieved year-to-date gains of 230%, 82%, and 51%, respectively. So Ark is probably rebalancing its portfolio by taking profits and redeploying them elsewhere.
For instance, the firm added to its stake in Twilio (TWLO 1.47%) in early November, plowing enough capital into the company that it now ranks as the ninth-largest holding in a portfolio comprising more than 120 stocks. That hints at high conviction.
Read on to learn more about this AI stock.
Twilio is a market leader in cloud communications software
Twilio specializes in customer engagement products across two business segments: communications and data and applications. The communications segment consists of application programming interfaces (APIs) for messaging, voice calling, video, and email. Those APIs let developers build applications with embedded communications capabilities without needing to integrate with carrier networks or worry about the underlying infrastructure.
The data and applications segment includes ready-made software products, and chief among them are the programmable contact center solution Twilio Flex and the customer data platform Twilio Segment. Both products differentiate Twilio from its competitors, but the customer data platform is particularly noteworthy because (in combination with communications APIs) it enables businesses to personalize customer interactions.
Indeed, the International Data Corp. recently recognized Twilio as a leader in the communications platform as a service (CPaaS) market, citing the synergy between Segment and its communications solutions as a key differentiator. IT consultancy Gartner also recently recognized Twilio as a leader in the CPaaS market, citing the expansive breadth and depth of its platform.
Turning to financial results, Twilio beat guidance and raised its full-year outlook in the third quarter, but its performance was mediocre at best. Its customer base expanded 9% to 306,000, but its expansion rate slipped 2,100 basis points, such that spending per existing customer was roughly flat compared to the prior year. As a result, revenue rose just 5% to $1 billion in the third quarter.
The silver lining was that Twilio reported non-GAAP (adjusted) net income of $107 million, up from a loss of $49 million a year earlier. That means the company is now generating positive cash flow.
Twilio is adding artificial intelligence capabilities to its platform
Investors have good reason to think Twilio can accelerate revenue growth in the future. The company accounted for 37% of CPaaS spending in the second quarter, meaning it held more market share than the next three vendors combined, and Segment has ranked as the market-leading customer data platform for four consecutive years.
With all that functionality under one roof, Twilio has a considerable edge where artificial intelligence (AI) is concerned, and its product roadmap aims to capitalize on that advantage.
Twilio recently unveiled CustomerAI, a suite of predictive and generative AI solutions that will help businesses better personalize communications. For instance, Predictions is a tool that helps marketers create hypertargeted audience segments based on predictive traits, and Voice Intelligence is a tool that extracts useful insights from customer communications. Twilio plans to release more AI-enabled tools to automate marketing and customer service workflows in the coming months.
Looking ahead, management values its addressable market at $116 billion by 2025, and Morningstar analyst Dan Romanoff expects Twilio to grow revenue at 9% annually over the next year. In that context, its current valuation of 2.6 times sales appears reasonable, especially when the three-year average is 12.8 times sales.
Investors should feel comfortable buying a small position in Twilio stock today, provided they monitor revenue closely in the coming quarters. I would personally be concerned if Twilio failed to reaccelerate sales growth in the next year, and I plan to keep my own position quite small until the company proves it can monetize its AI products.
