It’s been a couple of weeks since Twilio (NYSE:TWLO) reported good fourth-quarter results. Unfortunately, investors focused on the company’s profit outlook for 2020, sending TWLO stock down by 7%.
The good news from the cloud communication specialist’s Q4 2019 results was that it beat on both the top– and bottom-line. Twilio reported sales and adjusted earnings of $331 million and four cents a share, $18 million and three cents higher, respectively than the consensus estimate.
However, the outlook for Q1 2020 and the full-year 2020 had investors in a grumpy mood.
Especially troubling was the 180-degree change in profit guidance. In the first quarter, it now expects to lose 10 cents, while analysts were estimating a four-cent profit. For the entire year, the consensus profit estimate was 24 cents; Twilio expects a 17-cent loss.
Should investors be worried about this big difference of opinion? I don’t believe so. Here’s why.
Pay Peanuts Get Monkeys
What’s the old saying? You have to spend money to make money.
In case you haven’t noticed, Twilio’s got a lot going on right now, much of it to scale its business for the enterprise customer. Not only does that cost money, but it also requires considerable lead time. As a result, its pathway to profitability will have to take a backseat in the near-term so that it can deliver sustainable recurring revenue.
This is not the time to be cheap about investments. CFO Khozema Shipchandler discussed the company’s plan in the Q4 2019 conference call.
“You can see our guidance of a loss of $22 million to $25 million in Q1 and we currently expect Q2 to show a higher loss, given that SIGNAL falls in May this year. Afterwards, we expect smaller losses in Q3 and then get back to break-even in Q4. Now, as to the drivers behind these investments, some are transitory in nature that we believe will benefit the business greatly in the long run and one is a bit more structural,” Shipchandler stated.
The three significant investments are opening an R&D Center of Excellence, bulking up its systems and infrastructure, and finally, investing in Flex, its programmable contact center platform.
These aren’t things you can put to the backburner. They’re the underpinnings of a business model geared to sustainable growth. To produce a profit now, at the expense of its business momentum, in my opinion, would be a disservice to long-time shareholders.
The company expects at least 30% growth in its sales in 2020 to $1.48 billion. Taking into account the major investments mentioned above, it expects a non-GAAP operating loss of $55 million, or 40 cents a share.
I would gladly trade a 24-cent profit in 2020 for 5-10 years of 20-30% sales growth. Wouldn’t you?
This is not the same murky picture of profitability that both Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have provided investors. The pathway to profitability for Twilio is clear. This time next year, I doubt shareholders will be grumbling about its decision to invest in its growth.
The question now is whether it’s enough to push Twilio past $130.
TWLO Stock Moving From $90 to $130 Was Easy
Back in December, I wondered if Twilio stock was worth more than $90 a share. At the time, it had fallen below $100 for the first time all year on perceived weakness in its guidance.
I believed that Twilio’s stock price should have been trading above $100, not below it.
“While the Q3 report does raise questions, it’s important to recognize that the company is still going to generate more than $1.1 billion of revenue in 2019, with a minimal loss of $5 million,” I wrote December 10.
“The fact that its revenue jumped 75% year-over-year in Q3 suggests Twilio’s platform still has a great deal of traction with companies that are looking to provide seamless communication for their customers.”
Since then, TWLO stock is up 32%.
A healthy stock market helps — the Invesco QQQ (NASDAQ:QQQ) is up 17% over the same nine weeks — but investors in the know understand that corrections are good for growth stocks. To head up in a straight line is unsustainable.
I’d bet my last dollar that hedge funds owning Twilio were buyers of its stock in the days following the release of the company’s third-quarter and fourth-quarter results. On the other hand, the weak hands were likely selling.
The concern about profitability is way overblown, and more importantly, utterly misguided, given the potential market share ahead of it.
Is $130 as good as it gets? Not by a longshot.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.