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Twilio Stock May Go From Being Too Expensive to Bargain Levels

Shares of cloud communications platform Twilio (NASDAQ:TWLO) dipped in late October after the company reported mixed third-quarter numbers that included a lame fourth-quarter guide for Twilio stock.

Twilio Stock May Go From Being Too Expensive to Bargain Levels

Source: rafapress / Shutterstock.com

At issue, revenue growth is expected to dramatically slow next quarter, while spending is dragging on profitability. In response to these growth slowdown and big spending concerns, TWLO stock shed more than 10% and presently trades about 40% off its all-time highs.

Even at its lowest levels in ten months, Twilio stock still looks richly valued. But, there is a strong bull thesis here which warrants that premium valuation, and this bull thesis is centered on three big ideas:

  1. Texting is the future of communication.
  2. Businesses will more intimately incorporate text communication into their customer experiences.
  3. When they do that, those businesses will turn to Twilio.

Because of this dynamic, Twilio projects as a company that will add a ton of customers over the next several years. All those customers will spend more and more on Twilio’s services over time. That will power robust revenue growth and gross margin expansion. Big revenue growth should drive materially positive operating leverage, meaning profit margins should expand in a big way.

Altogether, the implication is that Twilio will be a big profit grower for a lot longer. Sure, a healthy portion of that profit growth is already priced in today. But, persistent weakness in TWLO stock will eventually create a compelling buying opportunity. I think that will happen around $90.

Texting Is the Future of Communication

Consumers, especially young consumers, are increasingly text-obsessed. Just take a look EZ Texting’s 2019 mobile usage report. The stats are baffling. Over 50% of consumers check their phones at least five times an hour, or about once every twelve minutes. Millennial and Gen Y consumers check their text messages once every eight minutes. So, if you want to reach a consumer (especially a young consumer) text them.

Further, those consumers are opening, engaging with, and replying to texts. According to EZ Texting, text messages have a 90% open, read, and response rate within 30 minutes. Texts are 134% more likely to be read than e-mails and have six times the engagement rate of an email.

Big picture: consumers love to text.

Businesses Will Pivot to Texting

The second part of the bull thesis on TWLO stock is that, because consumers love to text, businesses will increasingly have to incorporate real-time texting into their customer experiences.

At present, business-to-customer (B2C) communication is heavily e-mail and mail dependent. Just think of all those promotional business e-mails that crowd your inbox every day, or of all those coupons and discounts that fly into your mailbox. Do you open many of them? I don’t. And I’m not alone. According to EZ Texting, marketing emails only have an 18% open rate.

Compare that to text messages, which have a 90% read-and-respond rate within 30 minutes. Naturally, if I’m a marketer looking at these stats, then the decision is obvious. Ditch the e-mails, and start texting my customers.

Over time, as the texting phenomenon becomes larger and larger, more and more businesses will make this decision. Thus, within the next few years, text communication will become the backbone of B2C communication.

Twilio Will Be A Big Grower

The third part of the bull thesis on TWLO stock is that, as text communication turns into the backbone of B2C communication, Twilio will morph into a huge company.

Currently, Twilio only counts roughly 162,000 businesses as customers. That number is up nearly three-fold year-over-year. But, it’s still a far cry from the 30 million-plus enterprises that are in the U.S. alone. About 70% of those businesses do e-mail marketing. That equates to 21 million U.S. businesses engaged in e-mail marketing today.

As stated earlier, text message marketing will become the new e-mail marketing. As it does, all 21 million of those e-mail marketing firms will turn into text message marketing firms. Broadly, then, Twilio’s serviceable addressable market within the next few years will be about 130-fold that of its customer pool today.

Will Twilio win overall 21 million of those customers? No. But, they will win over the lion’s share of them, given that Twilio is the de facto leader in this market, according to customer ratings volume and quality.

Overall, then, Twilio will add a ton of customers over the next few years. As they do, revenues and profits will surge higher, and so will TWLO stock.

Bottom Line on Twilio Stock

Twilio stock is a long term winner. A lot of that long term winning is already priced in. But, by my numbers, Twilio has a realistic opportunity to hit $4 in earnings per share by fiscal 2025, powered by the aforementioned secular growth tailwinds in texting as a B2C communication tool.

Based on those $4 in 2025 profits per share, a software application sector-average 35-times forward earnings multiple, and a 10% annual discount rate, I think that shares are fairly valued today around $85. Thus, TWLO stock is getting close to undervalued territory. If it gets there, the current sell-off will turn into a buying opportunity.

The investment implication? Be ready to buy the dip if the current weakness in Twilio stock persists.

As of this writing, Luke Lango was long TWLO.

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/twilio-stock-too-expensive-bargain-levels/.

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