It’s almost cliche for many investors to dismiss growth stocks like Twilio Inc (NYSE:TWLO) by arguing that “the earnings don’t even matter.” In the case of Twilio stock, however, that’s not far from the truth.
And that’s OK, at least for now. Twilio’s growth runway is long enough that if sales continue to increase, margins — and TWLO stock — will figure themselves out at some point.
That’s a good thing heading into Twilio earnings on Tuesday. Coming off a 2016 where revenue increased 66% year-over-year, including 60% in Q4, analyst consensus suggests a ~41% increase in Q1 — a deceleration that seems to give TWLO room for a top-line beat.
The inherent long-term leverage in the company’s communications platform as a service (CPaaS) model means investors will forgive any miss on the bottom line. At least one analyst has already forecast a Q1 revenue beat.
Meanwhile, Twilio has an ace up its sleeve: a partnership with Amazon.com, Inc. (NASDAQ:AMZN).
With more detail on that arrangement, a reasonably set bar for sales and TWLO stock still only bouncing off post-IPO lows, Twilio earnings look like they should be good news.
Twilio Earnings: What to Watch
Twilio shares aren’t cheap, to be sure. TWLO stock trades at about 7.2x the midpoint of 2017 revenue guidance. That’s one of the highest multiples in the entire market, and closer to the valuation given to larger high-flying cloud plays like Splunk Inc (NASDAQ:SPLK) and Veeva Systems Inc (NYSE:VEEV).
But few stocks in the market can match Twilio’s revenue growth, which is guided to 33% for the full year. Expect a modest contribution from the acquisition of Beepsend, but organic growth should be near 30%.
And there’s reason to expect a strong Q1 report. Twilio beat estimates in both Q3 and Q4 (though neither did much for TWLO stock). Facebook Inc (NASDAQ:FB) unit WhatsApp is a key customer, providing 6% of revenue in Twilio’s Q4. That business is growing nicely and should help results in Q1 and beyond.
Below the top line, the two key figures to watch are the number of customer accounts, and what Twilio calls the “net expansion rate.” The former figure will show Twilio’s reach — and the total was already over 36,000 coming out of Q4. The latter figure is similar to a same-store sales number for a retailer, showing year-over-year growth within existing customers.
If Twilio can show strength in both numbers, revenue should beat expectations for the third-straight quarter. With profit and margin questions still in the distance, a top-line beat — this time — should boost TWLO stock.
The Amazon Question
Amazon’s casts shadows across industries from apparel retail to industrial distribution to convenience stores. The Seattle juggernaut’s Amazon Web Services (AWS) could be a potential rival to Twilio if it chose to build out the cloud-based voice capabilities offered by Twilio.
That seems unlikely.
Amazon and Twilio were already partners, before Amazon further integrated Twilio into services like Amazon Connect and Amazon Chime, among others. Those integrations were part of the rationale for a recent upgrade of Twilio stock by JPMorgan Chase & Co. (NYSE:JPM).
The potential for AWS revenue surely will be a topic of discussion on the Twilio earnings call. And given the fantastic growth at AWS, that, too, seems likely to be good news for TWLO stock.
Twilio Stock Looks Like A Buy
TWLO isn’t without risk. The focus on revenue can be a double-edged sword: Any miss relative to expectations could lead to a sharp, post-earnings haircut. The stock already is down by about half from post-IPO highs above $70 reached in late September.
But the Twilio story is much cleaner at the moment. The lock-up has expired — a 7-million share secondary offering only added to the selling pressure on Twilio stock. TWLO shares have bottomed, and twice bounced off support around $27, usually a bullish technical sign.
Like many growth stocks, TWLO has a high multiple and some downside risk. But its growth is stronger than most software plays and the silver lining of the recent weakness is that expectations have come down. Twilio likely doesn’t have to have a perfect Q1 report — just a good one.
And between recent history, contributions from Facebook and Amazon, and reasonable expectations, Q1 seems likely to be good enough — at least. That should give a boost to Twilio.
The author has no positions in any securities mentioned.