Twilio (NASDAQ:TWLO) stock dropped in late October after the cloud communications giant reported third-quarter numbers that smashed consensus estimates, but also included a weaker-than-expected profit guide for the fourth quarter.

Because Twilio stock has been so hot for so long — as of this writing, the stock is up 194% year-to-date — even the slightest perceived imperfection in the earnings report was due to cause weakness in shares.

And that’s exactly what you’re getting. A weaker-than-expected fourth quarter profit guide is a slight imperfection. That slight imperfection is causing weakness in perfectly valued TWLO.

But there’s two important things to note here:

1. Twilio management has a tendency to under-promise and overdeliver. This looks like more of the same, meaning actual fourth-quarter numbers will likely blow this weak guide out of the water.
2. TWLO stock is a long-term winner, powered by secular tailwinds in cloud communications.

Accordingly, then, this dip in Twilio is little more than a golden buying opportunity in a name with a ton of long-term upside potential.

Here’s a deeper look.

Twilio Stock: The API Economy

Zooming out, TWLO stock is a long-term winner because the company is emerging as the leading technology platform for providing communication APIs, at a time when such APIs are on the cusp of going from niche to ubiquitous.

What exactly does that mean?

For starter’s, we are are rushing into the API Economy. A quick refresher: API is short for application programming interfaces, and communication APIs are essentially little blocks of code that enable seamless communication between different software services, so that one computer can “talk” to another computer.

In essence, communications APIs are what allow Uber (NYSE:UBER) to send you texts when your ride is here, or Postmates to send you a ping when your food has arrived, or Zoom (NASDAQ:ZM) to operate on your HP laptop the same way it operates on your iPhone. Communication APIs enable all of that.

Because we are moving into an economy wherein everything is built on software, communication APIs are becoming increasingly mission-critical and ubiquitous, to a point where many technologists say that we have entered the API Economy — or an economy where all communication is powered by these APIs.

Who is at the center of this API Economy megatrend? Twilio.

A Communications API Juggernaut

Twilio broadly makes APIs that enable communications apps, like messaging and video chat apps, to work with any software service, on any hardware device, at any time and in any place.

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 — and they are the best in the world at doing so.

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.

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.

Strong Momentum Today

Twilio’s third-quarter earnings report confirmed that the company has robust business momentum today, amid a rapid shift among enterprises and consumers towards more virtualized services.

Twilio added 8,000 customers in the quarter, growing its customer base by 20% year-over-year. Dollar-based net expansion rate of existing customers clocked in at an impressive 137%. Revenues rose 52% year-over-year. Operating margins expanded 285 basis points, and what was an operating loss in the year ago quarter, swung to a profit this quarter — marking the third consecutive quarter of positive operating profits.

Clearly, everything is going right for Twilio today. The customer base is expanding. Those customers are spending more. Revenues are roaring higher. Margins are expanding. Losses are turning into profits.

But what about the guide, which calls for Twilio’s revenue growth to meaningfully slow in Q4 and for this profit streak to end?

Don’t ignore it. But take it in context, with that context being that this is a management team widely known for under-promising and over-delivering. The company has, after all, topped both revenue and earnings expectations for 12 straight quarters, and the beats haven’t been small. Twilio has, throughout 2020, consistently topped quarterly revenue expectations by ~10%.

The fourth quarter guide is just another under-promise, over-deliver situation. Actual fourth quarter numbers will smash this depressed guide, and TWLO stock will rebound with vigor over the next few months.

Bottom Line on TWLO Stock

Twilio stock is a long-term winning because the company’s APIs are turning into the building blocks of communication in the modern, digital era. The company’s revenue and profit growth trajectories will remain robust for the next several years, and over that stretch, TWLO stock will keep pushing higher.

So don’t stress this post-earnings dip in the stock. Instead, embrace it. Buy the dip. And let secular tailwinds get this stock back on a long-term winning trajectory.

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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