It’s not too late to buy cloud communications platform specialist Twilio, Inc. (NYSE:TWLO), which has seen its shares gain more than 14% over the past month. TWLO stock up 31% since reaching its 52-week low of $22.80 in May.
Fresh off its brutal first quarter earnings report, the San Francisco-based company, still has 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), among others. Twilio specializes in cloud-based software that helps developers make and receive phone calls, text messages and video chats.
TWLO stock, which closed Wednesday at $29.25, has risen almost 20% since I recommended the shares in May. Although the company still faces some challenges, there continues to be the appeal of improved fundamentals, suggesting that the market grossly overreacted from the company’s conservative guidance. This explains why the shares have rebounded in the past month. Despite the bounce, TWLO stock can still reach $40 in the next 12 to 18 months and should be owned by investors with an appetite for risk.
Reasons to Like Twilio
For starters, Twilio’s move above its 52-week low in such a short time strongly suggests that the bottom has been reached. The “falling knife” does not apply here. It’s also encouraging that company insiders have stepped up to the plate. Shortly after the shares collapsed following the Q1 results, Twilio CEO Jeff Lawson bought 100,000 shares at an average price of $23.43, investing some $2.34 million in total.
Then, following closely after Lawson’s buys, Twilio director James McGeever acquired 10,000 shares at $23.19 a piece. As it stands, both Lawson and McGeever, who arguably established a floor on TWLO stock, are now each up about 30% on those buys.
The executives realized that the stock’s punishment was an overreaction to the company’s weak second-quarter guidance, which included a warning that Uber — one of Twilio’s largest customers — was using solutions of another company in different operating territories.
To be sure, while Uber’s an important client — some 12% its business — Twilio still has an active customer base that is approaching 41,000 names and is on track to add over 4,000 new active accounts this year. These names not only helped Twilio grow revenue at a healthy 47% in Q1, adjusted gross profit jumped 56.8% year over year to $51.1 million. The company is benefiting from a combination of efficiency gains and business mix.
Assuming Twilio beats its second-quarter revenue guidance of $85.5 million to $87.5 million (mid-point $86.5 million), and possibly increases its forecast, Twilio stock — one of last year’s most successful IPOs — should regain its status as a Wall Street darling.
Given that the company’s base revenue guidance calls for an increase well-above 50% suggests that management plans to diversify the revenue stream.
Bottom Line for TWLO Stock
TWLO shares were arguably overvalued following its initial public offering, where shares quickly gained to $70.96, a level not seen since. But given that the management has begun to focus on profitability and ways to improve margins, Twilio — currently trading at about 10 times book value — is priced on more reasonable assumptions.
With the company adding strong security features to its platform, and working on ways to better leverage its services in the enterprise space, TWLO should reach $40 by this time next year, delivering 35% returns from current levels.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
