Throughout 2021, Twilio (NYSE:TWLO) tried to break out above the $400 level. That excludes the February technology stock euphoria that sent TWLO to a $457.30 high.
After those disappointments, bulls gave up on the cloud software firm.
After Twilio posted quarterly earnings on Oct. 27, the stock continued facing bearish selling pressure. Short sellers are not betting against it with a small 3% short float, so why are investors dumping shares?
Twillio trades at a $51 billion market capitalization and a 20 times price-to-sales ratio. On the surface, the company does not look like it has value. Yet internet content stocks like Airbnb (NASDAQ:ABNB) or Meta Platforms (NASDAQ:FB) trade at bigger market capitalizations. Twilio offers compelling revenue and customer growth.
In the third quarter, Twilio posted revenue growing by 65% year-over-year to $740.2 million. Twilio’s co-founder and Chief Executive Officer Jeff Lawson highlighted the company’s next generation of its customer engagement platform. “Twilio Engage” will suit companies of any size.
It offers hyper-personalized marketing campaigns “on every channel for customer acquisition, conversion, and retention,” according to Lawson.
Lawson has a roadmap to lead the company as the top customer engagement platform. It will get there by building its CPaaS (Communications Platform as a Service) offering.
This includes considering strategic acquisitions if the price is right. The company has a healthy balance sheet and plenty of cash.
The Nasdaq’s recent weakness could lower the valuations of company targets. For now, Twilio has a good technology stack. Customers still need it in fulfilling its digital transformation plans.
TWLO Stock Presents an Opportunity
Twilio is aiming to grow by at least 30% over the next three years. Assuming that rate over the next five years, TWLO stock is trading at close to fair value. Investors may build a 5-year discounted cash flow EBITDA Exit model. This model uses an EBITDA Exit multiple to calculate Terminal Value after five years.
The metrics below assume an optimistic growth scenario:
|Discount Rate||7.8% – 6.7%||7.20%|
|Terminal EBITDA Multiple||76.8x – 78.8x||77.8x|
|Fair Value||$235.62 – $249.14||$242.28|
The firm may increase its growth rate if customers embrace its new product offerings including Flex. Small and medium-sized businesses may consider Flex.
The product suits customers of any size. Enterprise customer growth will increase as Twilio expands internationally.
Twilio’s messaging business is growing at accelerated rates. The company will expand gross margins by adjusting its product and service mix. In addition, it will continue investing in systems like Application-to-Person (A2P) type messaging.
In the longer term, Twilio may grow its business by 60% or more, double the 30% near-term forecast.
The company’s gross margins fell more than investors expected. But past acquisitions that build Flex’s roadmap take time to pay off. Investors need to believe that management will deliver on a 60% growth rate over the long term.
The Risks Are Real
The gross profit of $364.6 million is up from last year’s $230.8 million. Yet gross margins slipped from 52% last year to 49%. Non-GAAP operating margins are worrisome.
At 1%, the company’s stock-based compensation is too high. This cost almost doubled from last year. Sales and marketing costs also rose sharply. This is an acceptable expense because the firm needs to advertise to grow its customer base.
Chief Operating Officer George Hu’s departure is also a concern. Hu took the role in 2017. The staff change could disrupt Twilio’s business momentum.
Most analysts on Wall Street covering the firm are optimistic, with 17 out of 18 rating it a “buy.” Per Tipranks, the average price target is $426.25. The price target range is $350 to $550.
Twilio’s stock grade is fair to poor, based on scores supplied from Stock Rover. Investors are not getting good value at current prices.
The below-average stock scores are typical for software companies in the growth phase. Investors who pay a premium today are betting that Twilio will meet its accelerated growth forecast in the next few years.
Twilio has a strong historical revenue growth rate. Its top 10 customer accounts as a percentage of total revenue are also falling (per slide 9). This lowers the risk for investors, as the company relies less on a handful of customers for the business.
The geographical expansion also lowers Twilio’s risk of relying on the U.S. market. For example, in Q3/2019, the company reported that 28% of revenue was international. In Q3/2021, it increased to 33%.
After bullish investors sold the stock, TWLO stock is more compelling for the growth investor. Technology stocks do not come cheap, especially for companies with a compelling platform offering.
Twilio is out of favor for now. One good quarterly earnings report in 2022 will reverse the bearishness hurting the stock’s performance.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.