With both the Dow Jones Industrial Average and S&P 500 index still trading in record territories, good luck finding huge bargains whether looking at small-caps or the biggest names on the market. But cloud communications platform company Twilio Inc (NYSE:TWLO) is one name to keep an eye on in the midst of a 45% decline in TWLO stock over the past six months.
What’s significant is that even though Twilio already has rebounded more than 30% from its 52-week lows, there’s another 30% gains to be had.
Twilio Has Graduated From Hype
If you bought and held TWLO stock when it reached its 52-week high of $70.96 back on Sept. 28, you’re down more than 55%. But that was when Twilio — one of 2016’s hottest tech IPOs raising $150 million after its shares skyrocketed from its initial price of $15 — was at the peak of its hype, but not showing peak results.
Twilio, headquartered in San Francisco, boasts some of the largest customers in tech, including Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX), Twitter Inc (NYSE:TWTR) and Salesforce.com, Inc. (NYSE:CRM).
Thanks to its strong list of clients, not only has Twilio’s revenues risen steadily, but the company’s platform — which provides features such as voice calling, SMS, chat and video — has become a leader in its space.
The problem is that TWLO has yet to record a profit — a fact that has brought short sellers in droves.
But earnings and revenue trends have become favorable. In most recent quarter, during which Twilio beat on both the top and bottom lines, Twilio also issued fiscal 2017 base revenue guidance — which excludes revenue from “Variable Customer Accounts” — to rise in a range of 48% 52%. Variable Customer revenues are revenues Twilio considers outside of its core customers.
However, it also expects total 2017 revenue to rise between 31% to 34%, which on the low end is 4 percentage points above analysts’ expectations for 27% growth.
Although Twilio has yet to indicate when it will become profitable, the fact that it earned an adjusted Q4 profit of 5 cents per share, versus consensus estimates for breakeven, suggests Wall Street continues to understate the company.
And here’s the thing: For the full year, Twilio narrowed its loss to 15 cents per share, from 48 cents a year ago. That is a drastic improvement from one year to the next.
The fact that TWLO stock hasn’t responded more vigorously higher underscores just how impatient investors have been, and maybe how unrealistic expectations have been.
Bottom Line for TWLO Stock
Still, there are two sides to this story.
It can be argued that TWLO stock was grossly overvalued at the height of its initial public offering. But as it now stands, when factoring the extent to which Twilio management has begun to focus on profitability, Twilio shares look grossly undervalued. Especially as the company, which added strong security features to its platform, is now better leveraging its services in the enterprise space.
Twilio stock, which continues to trade about at 10 times book value, looks more appealing each quarter.
Wall Street’s consensus 12-month price target is calling for $40 per share, suggesting 30% returns. And shares remain down 45% in six months even though the fundamentals continue to improve.
TWLO stock is a buy for anyone willing to hold for the next 12 to 18 months.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
