Twilio (NASDAQ:TWLO) stock has been on fire in 2020 as the Covid-19 pandemic has accelerated enterprise digitization trends and created increased demand for cloud-communications tools.
TWLO stock is up 124% in 2020.
Many pundits say the high valuation of TWLO stock means that its rally is overdone. After all, Twilio stock is trading for 24 times its sales. One could reasonably argue that the stock is already priced for huge growth.
Indeed, my numbers suggest that the share price does indeed already reflect rapid future expansion by the company.
But concerns about the company’s valuation are not intense enough to stop TWLO stock from powering higher. Further, the outlook of the company is sufficiently strong to enable the shares to keep climbing for the foreseeable future.
Twilio’s Outlook Is Too Good
It’s important to note that Twilio stock has entered “story stock” territory.
And, as we’ve seen with the likes of Tesla (NASDAQ:TSLA), Shopify (NYSE:SHOP) and Zoom (NASDAQ:ZM), story stocks can ignore valuation worries and keep powering higher, as long as their outlooks remain robust and compelling.
For the foreseeable future, that’s exactly what will happen to Twilio; its story will remain robust and compelling, and TWLO stock will keep moving higher.
Twilio is the leading provider of application program interfaces, or APIs, for cloud communication. APIs are increasingly becoming critical to companies in a world in which physical offices are shut down and employees and customers are working remotely.
As a result of these trends, demand for cloud communications APIs is surging. This surge won’t taper off anytime soon. Even as physical offices reopen, the digitization of communication, enabling communication all the time and everywhere, is a trend which will never go away.
Thus, for the foreseeable future, Twilio’s growth outlook will remain robust, and the news about the company will remain overwhelmingly positive. Further, its earnings reports will smash expectations, and its guidance will continue to be impressive. As a consequence, Twilio stock will remain strong.
The Shares Are Not That Overvalued
Helping Twilio stock will be the fact that, compared to other story stocks, Twilio isn’t that overvalued.
As my readers know, I value stocks by looking at companies’ profit-growth potential over the next five to ten years. Sometimes when I evaluate story stocks using that method, I conclude that they are currently overvalued by 50% or more.
My analysis suggests that TWLO stock is trading slightly below its fair value.
For my analysis of Twilio, I’m assuming that the company can continue to add roughly 50,000 new customers per year over the next decade and grow its average revenue per user due to its expansion into new communication areas. I’m also factoring in margin increases that will likely occur as the company grows.
My numbers suggest that Twilio has a realistic chance to generate earnings per share of $15 by 2030.
Based on a forward earnings multiple of 35, which is average for the application-software sector and a 10% annual discount rate, my 2020 price target for TWLO stock is about $225.
That’s slightly above the shares’ price today.
So, relative to other story stocks with significant long-term growth potential, Twilio stock is more attractively valued.
The Bottom Line on TWLO Stock
Twilio stock is a great buy at this point. Actually, the best time to buy this stock has already come and gone.
But the stock will likely remain strong for the foreseeable future, despite investors’ valuation concerns, because its fundamental growth and its outlook will remain favorable. Plus, its valuation isn’t that out of touch with its fundamentals.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long TWLO and SHOP.