Twilio (TWLO +1.80%) stock has been red-hot on the market in the past six months, rising an incredible 148% as of this writing as investors seem to have recognized the potential impact of the growing adoption of artificial intelligence (AI) on the company's business.
Twilio's red-hot rally started in October 2024 when the company delivered a solid set of results along with better-than-expected guidance. The parabolic jump in Twilio's stock price in the past six months means that it has turned out to be a better investment than AI pioneer Nvidia. The semiconductor giant's 6% gains in the last six months are nowhere near Twilio's, as investors seem to be concerned about Nvidia's ability to sustain its AI-fueled growth.
NYSE: TWLO
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Of course, Nvidia could regain its mojo and deliver healthy gains in the future thanks to its dominant position in AI chips and software. However, an expensive sales multiple of 31 and a price-to-earnings ratio of 56 may put investors in a dilemma if they are thinking of buying Nvidia right now, especially considering the potential impact that China's DeepSeek AI start-up may have on AI hardware spending.
Twilio, on the other hand, is significantly cheaper and has the potential to deliver more gains despite its recent rally. Let's look at the reasons why buying Twilio right now could turn out to be a smart move.
AI gives Twilio a terrific opportunity to supercharge its growth
Twilio operates in the communications platform-as-a-service (CPaaS) market. Its cloud-based solutions allow businesses to communicate with their customers through various channels such as voice, chat, email, and messaging. This market was growing at an incredible pace earlier, but was hit by a slowdown in 2023, owing to a pullback in spending by customers.
More specifically, Twilio's revenue grew at an annual rate of 58% for the five-year period ending in 2022, according to management consulting firm Analysys Mason. In 2023, however, Twilio reported just 9% growth in its revenue. Analysts are expecting Twilio to report 6.7% revenue growth for 2024.
But a closer look at the company's recent results indicates that it is stepping on the gas. Its revenue in the third quarter of 2024 increased 10% year over year to $1.13 billion. Twilio attracted more customers and also witnessed an increase in spending by its existing customer base, with AI playing a central role in helping accelerate its growth.
AI is set to expand Twilio's addressable market significantly, as management pointed out in its latest investor day presentation on Jan. 23. The company is anticipating its total addressable market to hit $158 billion in 2028, with $39 billion attributable to AI-based opportunities such as conversational AI assistants.
More importantly, the company's AI-centric offerings are gaining traction among customers and having a positive impact on its top line. Out of Twilio's 320,000 active customer accounts at the end of the third quarter last year, 9,000 were building AI applications on its platform. The company's trailing-12-month revenue from customers using its AI solutions stood at $260 million in the third quarter of 2024.
That number should head higher as more of its customers start building AI applications on its platform, enabling Twilio to capture a bigger share of the addressable opportunity that it sees after three years. The number of active customer accounts buying add-on products from Twilio has increased following the introduction of AI-focused solutions.
The company witnessed a 16% year-over-year increase in active customer accounts purchasing add-on products in the third quarter of 2024, up from 11% in the year-ago period. As a big majority of Twilio's customer base are yet to adopt its AI solutions, there is still a lot of room for the company to grow on this front.
Twilio's preliminary numbers for the fourth quarter of 2024 tell us that it is indeed witnessing an improvement in its growth profile. The company says that its Q4 2024 revenue increased 11% year over year, outpacing the guidance range of 7% to 8%. Non-GAAP (generally accepted accounting principles) income from operations, meanwhile, is set to exceed the top end of its guidance range for both Q4 and the full year.
These preliminary numbers have given Twilio stock a big shot in the arm. What's more, Twilio's guidance for the next three years suggests that the stock is on track to deliver more gains.
The long-term guidance points toward more stock upside
Twilio management pointed out in its investor day presentation that its non-GAAP operating margin could land between 21% and 22%. That would translate into robust bottom-line gains, since Twilio reported an adjusted operating margin of 16% in the previous quarter.
Meanwhile, Twilio's cumulative free cash flow forecast of $3 billion for the next three years would be a major improvement over the $692 million cumulative free cash flow it has generated in the past three years. The company also expects to become profitable on a GAAP basis from 2025. All this indicates that better times lie ahead for Twilio, which is why it may be a good idea to buy the stock while it is still trading at a reasonable valuation.
Twilio has a price-to-sales ratio of 5.4 and forward earnings multiple of 32. The company's earnings in 2024 jumped by an estimated 50%, and this discussion suggests that it is on track for robust bottom-line growth over the next three years as well. So, investors looking to buy an AI stock would do well to take a closer look at Twilio, as its remarkable rally seems sustainable.
