About a year ago, Twilio Inc (NASDAQ:TWLO) took the market by storm. The cloud communications platform maker nearly doubled on its first day of public trading, despite an initial public offering ($15) that was above the expected range.
Things only got better from there: Three months after its smash debut, TWLO stock was up to $68, with scarcely a bump along the way.
Since then, it’s been all downhill. The stock fell off a cliff in October, dipping as low as $30. And after a short-lived post-election rally, TWLO plumbed new depths once the calendar flipped to 2017, sinking to $25 on the first trading day of the year.
It showed signs of life in April before a combination of weak guidance and a fracturing relationship with Uber sent TWLO stock plummeting again the first week of May, sending it to new lows at $23.
A month later, on the cusp of the one-year anniversary of its illustrious market debut, TWLO still trades lower than it did at the end of its first day of trading. Given its auspicious beginning, Twilio has been a major disappointment.
The easy position is to take one look at the chart, the lack of profits and the high price-sales ratio (7.5) and completely dismiss TWLO as a viable investment option. If you look deeper, however, there are reasons for optimism. I count three:
Sales Growth Remains Strong
For all of Twilio’s bottom-line faults, most companies would kill for its sales growth. The company’s revenues swelled 66% in 2016, though they dipped to 47% in the most recent quarter and are expected to sink to around 33% in the current quarter, according to Twilio’s own guidance.
But customer growth is healthy: the company added 4,000 new clients in the first quarter, well ahead of its 2,800 quarterly average. Those new clients should help compensate for the decision by Uber, which accounted for 12% of total revenue last quarter, to scale back its Twilio business in the coming year.
Amazon Web Services
What should help Twilio’s efforts to be less reliant on Uber is its new deal with Amazon.com, Inc.(NASDAQ:AMZN). Earlier this year, Twilio came to terms on a contract with Amazon Web Services that integrates Twilio’s APIs with Amazon Connect, Amazon’s new cloud-based contact center service.
Twilio’s platform enables Amazon Web Services customers to personalize contact flows to greatly limit spammy and/or fraudulent communications.
For Twilio, being in bed with Amazon allows it to build more channels and thus reach a wider audience — meaning those already expanding customer numbers could improve in the coming quarters.
TWLO Stock Is Quietly Building Momentum
The long view of TWLO’s chart is ugly. But the stock is up more than 8% in the month since its early-May cratering, touching as high as $26 in late May. If TWLO can inch its way back to its 50-day moving average ($27), it will suddenly have plenty of momentum.
The list of high-powered tech companies that struggled in their first year of public trading reads like a who’s who of today’s best growth stocks. Facebook Inc (NASDAQ:FB) declined more than 30% in its first year of trading; Apple Inc. (NASDAQ:AAPL) was a losing stock for its first two years of trading; Netflix, Inc. (NASDAQ:NFLX) took nine months to get going.
Early growing pains are normal, even for tech companies that were far more mature and higher-profile than Twilio. Twilio still has a unique business model that Wall Street is only beginning to comprehend. As its audience expands, Twilio’s brand will become more mainstream, and its stock will stabilize.
For those reasons, I think TWLO stock remains a strong long-term option for the patient investor.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
