The first month of 2020 was a bumpy one on Wall Street. But despite the turbulence, some equities managed to shine. Cloud communications specialist Twilio (NYSE:TWLO) is one such company who beat the market and delivered to investors throughout January. TWLO stock rose nearly 20% throughout January, making it one of the market’s top performers.
However, those gains could be erased over the next 24 hours as the firm reveals its fourth-quarter results on Wednesday. On the other hand, Twilio also has the makings to become a star performer for the year depending on how this quarter’s results play out. Here’s a look at what to watch when Twilio reports on Wednesday.
Billing Issues Resolved
Perhaps the most important factor in Twilio’s results will be management’s comments on whether or not the firm’s billing issues have been resolved. Following the firm’s Q3 results, investors quickly abandoned Twilio after management offered much weaker guidance than expected. A big part of the reason for the lowered expectations was a billing issue that meant some customers had been overcharged in previous quarters.
In Q3, management said the issue had been fixed — but that didn’t stop them from scaling back Q4 expectations. The firm said it was expecting to deliver revenue between $311 million and $314 million in Q4 and between $1.11 billion and $1.12 billion for the full year.
At very least, Twilio needs to hit those targets. Anything less than that will send TWLO stock into a nosedive, especially considering its impressive rally over the past few weeks. Investors are expecting big things, so a misstep would be disastrous.
On the other side of the coin, there’s a good chance that management was overly conservative in its estimates, which could offer an upside surprise. The billing issue itself isn’t likely to have a long-term impact on the firm’s growth story. So, if there was a minimal impact in Q4, investors are likely to celebrate.
Execution on Strategic Plans
Another factor investors will be watching is how Twilio is executing on its strategic plans. After all, a big part of the reason many added the stock to their portfolio is the enormous amount of potential growth that Twilio offers. The firm mainly provides in-app communications for developers, everything from messaging to password resets.
That business has proven extremely scalable for Twilio, especially considering that its customers tend to be sticky. Twilio has more than doubled its active users over the past five years, boasting more than 64,000 active users in Q3. Investors will want to see that number grow further in Q4 as management continues to expand the platform.
SendGrid Integration
Another hot topic for Twilio’s Q4 results will be SendGrid, an email platform that the company purchased last year. According to Morningstar analysts, SendGrid represents a huge growth opportunity for Twilio and should boost revenue significantly in the coming year.
“SendGrid’s email platform was the missing link in Twilio’s communications tools and should drive material cross-selling opportunities.”
Investors will be on the lookout for SendGrid’s performance in Q4 as well as management’s plans on how to leverage the cloud-based email platform moving forward.
The Bottom Line on TWLO Stock
Buying a hyped-up stock before earnings isn’t always the best strategy, but I certainly wouldn’t sell now. There’s a chance Twilio misfires in Q4 and its billing woes have a greater impact than previously expected, but that would only create an even better buying opportunity. Twilio’s long-term growth story is a strong one. The firm claims to have a $66 billion addressable market when you take into account the potential of its newly acquired email arm.
Of course, Twilio doesn’t come without risk. Perhaps the biggest of which is its dependence on large contracts. Approximately 18% of the firm’s revenue comes from its 10 largest contracts. In 2018, WhatsApp accounted for 7% of that. What’s more, Whatsapp’s business isn’t guaranteed because the firm doesn’t have a long-term contract. The fluidity of Whatsapp’s contract with Twilio means the value of that account can change from term to term, something that could be unnerving for investors.
All in all, Twilio looks like a solid long-term growth play. Regardless of how earnings pan out this week, investors can expect the firm to continue performing well into the future.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
