Recent Weakness Is an Opportunity to Buy Twilio

The recent sell-off in red-hot technology stocks offers investors a golden opportunity to buy some long-term winners at discount prices, and this is perhaps most true when it comes to Twilio (NASDAQ:TWLO) stock.

The Twilio (TWLO) logo is displayed over a white background on a smartphone screen.
Source: rafapress / Shutterstock.com

Twilio is a long-term winner in the digital economy, with a stock that’s been on fire all year long. That fire in the stock has been briefly put out over the past month. But the core fundamentals underlying TWLO stock remain as robust as ever. The only thing that has changed is that the stock price has fallen into discount territory.

So don’t overthink this one.

Buy the dip in TWLO stock.

Here’s a deeper look.

The API Economy

Welcome to the API economy. For those who aren’t familiar, APIs is short for application programming interfaces, and they are essentially little blocks of code which enable seamless communication between different software services.

Because we are moving into an economy wherein everything is built on software, APIs are becoming increasingly mission-critical, to a point where many technologists say that we have entered the API economy.

Twilio is a communications API company that is at the heart of this economy. The company broadly makes APIs which enable communications apps, like messaging and video chat apps.

Long story short, if I’m a business and I want to leverage SMS texting to communicate with my customers, then I’m going to use Twilio’s APIs to make sure that the message I send out is seamlessly communicated to every one of my customers, regardless of their phones’ software or version.

Lather, rinse, repeat for video chat and phone services.

To that end, Twilio makes the building blocks for modern communications apps. Usage of these communications apps will soar over the next several years as businesses increasingly adopt hybrid work environments, and as brands and consumers alike lean more heavily into digital communication channels. As that happens, demand for Twilio’s communication APIs will soar, too, guaranteeing the company huge revenue growth potential over the long run.

Business Is Scalable

Even more than that, because Twilio is built on the back of a highly scalable software business model with huge gross margins, there’s ample runway for Twilio to improve its profitability profile over the next few years, from flattish operating margins today to 25%-plus operating margins at scale.

Big revenue growth plus big margin expansion equals huge profit growth. As go profits, so go stocks.

It doesn’t take a rocket scientist to connect these dots. Huge profit growth will power huge gains in TWLO stock over the long run.

Huge Long-Term Growth Potential

My numbers indicate that TWLO stock does indeed have huge long-term upside potential, based on the company’s profit growth prospects.

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, given the inherent scalability of the business model.

Assuming so, 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, that equates to a 2029 price target for TWLO stock of $525 – more than double today’s price tag.

Discounted back by 8.5% per year, that implies a 2020 price target for TWLO stock of roughly $250.

Thus, TWLO stock has both huge long-term upside potential and is attractively undervalued today.

Near-Term Upside Drivers for TWLO Stock

Over the next few months, a few upside drivers should propel TWLO stock higher.

Those upside drivers include:

  1. A rebound in enterprise discretionary spending on things like communication APIs, as the global economic environment normalizes against the backdrop of record-low interest rates and tons of fiscal stimulus.
  2. A more permanent shift toward hybrid work environments in 2021, which will increase the ubiquity of digital communications platforms and therefore increase the need for digital communication APIs.
  3. Sustained robust margin expansion on the back of sustained big revenue growth, which will help drive huge earnings beats over the next few quarters.

Together, these three drivers should help TWLO stock rebound to and potentially even above $250.

Bottom Line on Twilio

Twilio stock is a long-term winner. This is just a near-term pullback.

Don’t overthink this one. Buy the dip today. Check back in year. The TWLO stock price will be much higher. Check back in five years, and it’ll be much, much higher.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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Article printed from InvestorPlace Media, https://investorplace.com/2020/10/twlo-stock-buy-growth/.

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