Ever since the share lockup for shares of Twilio Inc (NYSE:TWLO) ended on Feb. 10, bearishness remained elevated with a short float of 28.85%. Though, valuations are highly unfavourable for this application software maker, the worst may be over for TWLO stock holders.

Insiders now have the freedom to sell stock, but after falling as low as $23.66 per share last month, they are in no rush. So TWLO stock has since rebounded nearly 32% from those lows.

Twilio needs to show signs of accelerating growth. Just recently, in its fourth quarter, the company grew revenue by nearly 60%, to $82 million. Earnings were breakeven as losses from operations reversed. That’s encouraging.

Revenue Forecast

The good news is that Twilio forecasts revenue of between $364 million to $372 million, exceeding the $352.6 million consensus estimate. The bad news is that the company expects negative earnings. Investors may choose to ignore losses for now since the company is spending aggressively to grow its business.

The business model depends on strong customer growth on its platform business model. Thanks to strong demand for software-based communications solutions, revenue growth is sustainable for the next few years.

TWLO Growth Strategy

On its conference call, Twilio detailed its steps in developing its high-level API functionality. The first step involves building a broad, horizontal platform. The second step is matching the customer uses cases and then building the company’s presence in that area of the market. Notify and Authy are just two examples of following through with this strategy.

Authy allows for advanced authentication for mobile and web apps. Twilio’s Notify facilitates notifying users the way they want to be notified, such as through SMS, iOS and Android push notifications. The API also supports Facebook Inc’s (NASDAQ:FB) Messenger (currently in beta).

Bhavan Suri is confident the company will maintain its leadership position. Not only does it have a strong product line across different categories, its business will expand as its accounts, like ING, roll out Twilio’s solutions. The operating model supports a gross margin in the 60% to 65% range in the foreseeable future.

API is not the only solution that contributes to that metric. Twilio’s IP chat, video and voice products also scale as business operations expand.

Related Companies

Acacia Communications, Inc. (NASDAQ:ACIA) is an optical networking company. Yet it is facing challenges in sales, after a single customer — Adva Optical Networking — likely caused the company to miss expectations. On Feb. 24, Acacia issued first quarter an earnings guidance of 63 cents to 70 cents per share, below the 78 cents per share consensus.

Square Inc (NYSE:SQ) is benefiting with higher margins as volumes and adoption for payments processing picks up. In the fourth quarter, Square grew revenue by 20.7% year-on-year to $452 million.

Bottom Line on TWLO Stock

The 29% short float on Twilio may create a short squeeze should the company raise its guidance or report strong quarterly earnings. At the end of last year, the company expanded its relationship with Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Web Services. The more AWS uses TWLO’s technology, the more money it will make.

It is only a matter of time before revenue growth exceeds the rise in costs. When that happens, Twilio’s stock will respond by moving higher.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.