Twilio (NYSE:TWLO) seems like an excellent business model for 2018. It’s no secret that traditional advertising firms are struggling, as customer behavior is changing faster than ever. As consumers evolve, it means that marketers must update their methods accordingly.

As Twilio CEO Jeff Lawson describes it, in the past, you gave people your phone number and that was that. Now there is email, texting, social media, smart home speakers, and the list goes on. As thing get more complicated, companies need the services of a firm like Twilio that can integrate their marketing strategies across various platforms.

And yet, as obvious of a winning business concept this may seem, TWLO stock had been a major dud up until 2018. Was the market too negative on Twilio previously, or is 2018’s surge overblown? Here’s what you need to know about TWLO stock.

Sales Or Profits?

The fundamental question for  investors is whether they should value TWLO stock on revenue or profit. After Twilio’s IPO, the stock surged from $25 to as high as $70 in 2016 on the basis of rapid revenue growth. However, those gains were short-lived.

By early 2017, TWLO stock had plunged back to $25/share, and proceeded to trade weakly until this year. The reason for this massive rise and fall was a change in perceptions.

When the company came public, investors were thrilled with the near 100% revenue growth rate. But as 2016 turned to 2017, it became clear that while revenue growth was still surging, the company would struggle to become profitable. It kept adding new customers and increasing revenue on existing accounts. And yet, with its costs to attract new customers and deliver services also mounting, Twilio seemingly couldn’t scale up fast enough to turn the corner as far as EPS goes.

Then, something changed in 2018.

Revenue Concentration

Previously, investors feared that Twilio’s reliance on several key customers could harm the company. Historically, Twilio has earned a sizable chunk of its overall revenue from WhatsApp — part of Facebook (NASDAQ:FB)  — and Uber. However, both of those companies have dialed back their reliance on Twilio’s services.

In 2015, when Twilio was floating its IPO, its 10 largest customers made up 32% of revenue. That contribution dipped to 30% in 2016 and almost halved to just 19% of revenue in 2017. A big part of this was that both Uber and WhatsApp pulled back on their spending, while Twilio kept signing up tons of other new accounts. Uber, for example, went from 14% of Twilio’s sales in 2016 to just 8% last year.

One of the risks to Twilio’s business is that large customers will build their own in-house solutions to replace Twilio’s functionality. The company has a strong hold on its small business customers — where any savings in switching away from Twilio wouldn’t justify the time and expense. With its large customers, Twilio is consistently at risk of clients defecting to cheaper rivals or doing the marketing work themselves.

However, Twilio seems to have reached the inflection point this year where it has enough smaller customers to offset further losses from its largest accounts.

When Will Revenue Lead To Profits?

Twilio has said that it would boost spending on customer acquisition. It’s willing to sacrifice gross margins in the short run in order to bring in more new clients. This is a valid bet to make; many tech companies give up profits today for greater market share in the future.

At some point, however, Twilio has to start earning profits to be able to sustain its stock price. Remarkably, the company is now selling at 16x sales, way above the 10x level that you’d expect to see for a small fast-growing sort of tech company. So TWLO stock is expensive even on its more favorable comparison metric, and on earnings, the company is barely above break-even.

This most recent quarter, for example, Twilio earned 3 cents per share in adjusted earnings. That beat analyst estimates, as they had projected a 6-cent loss. However, using GAAP accounting, Twilio lost $22 million, or 25 cents per share. And yes, the things that do get adjusted — such as stock-based compensation — are a real cost to shareholders.

Going forward, on an adjusted basis, Twilio is projecting earnings of 2-3 cents for both next quarter and the full year 2018. Analysts now have TWLO stock at 550x forward earnings, as earnings are expected to be almost nonexistent over the next year. At this point, Twilio’s $8 billion market cap is supported by half a billion dollars of annual revenue, and either flat income on an adjusted basis or losses of close to $100 million per year on a GAAP basis. That’s a steep valuation.

TWLO Stock Verdict

TWLO stock has enjoyed the market’s reevaluation. Investors complained that Twilio was way too tied to the fortunes of a few of their key customers. In 2018, the company has demonstrated that it can still grow revenue regardless.

That said, Twilio still has to prove that it can convert all these new revenue into profits at some point. The market is now buying Twilio for its revenue growth potential again. But at some point, the pendulum will swing the other way, and the market will start expecting Twilio to make meaningful positive EPS. If they can’t get that done, another 2016-17 style slump could hit TWLO stock hard.

At the time of this writing, Ian Bezek owned FB stock.