Shares of
twilio (twlo 6.12%) have fallen almost 60% this year as investors worried about slowing growth, declining gross margins and the increased losses of cloud-based communication platform company. Widespread selling of higher-growth tech stocks, fueled primarily by rising interest rates and other macroeconomic headwinds, exacerbated that pain.
But has that strong sell-off presented a buying opportunity for long-term investors who can tune out the short-term noise? Let’s review the twilio business model, its challenges and evaluations to decide.
Reading: Is twilio stock a buy
what does twilio do?
twilio’s cloud-based platform handles text messages, voice calls, videos, authentication alerts and other features for mobile applications. Instead of building those functions from scratch, which can be time-consuming and difficult to scale as an app gains more users, developers simply outsource those functions to twilio with a few lines of code.
Today, twilio’s services connect airbnb hosts with their guests, lyft drivers with their passengers, the American Red Cross to its volunteers. also established a pioneering advantage over other cloud-based communications platforms such as messagebird, vonage‘s nexmo (vg), and bandwidth (5.14% bandwidth) .
how fast does twilio grow?
The number of active twilio accounts grew 14% year over year to 268,000 in the first quarter of 2022, but that represented a significant slowdown from previous quarters. its revenue growth has also slowed for three straight quarters, even after accounting for its recent acquisitions. here’s a look at recent year-over-year numbers.
data source: twilio.
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twilio’s revenue grew 61% to $2.84 billion in 2021, but much of that growth came from its segment and zipwhip acquisitions. Excluding those two acquisitions, its revenue grew just 42% organically.
On an organic basis, its revenue grew 35% year-over-year in the first quarter of 2022 after excluding its zipwhip revenue. but for the second quarter, it expects its reported revenue to grow only 36% to 38% year over year, and its organic revenue to rise 27% to 29%, its slowest organic growth rate in five quarters. .
Twilio’s growth rates remain high, but it previously targeted organic revenue growth of more than 30% through 2024. CEO Jeff Lawson reiterated that long-term goal during the Q1 conference call , even though its second-quarter guidance fell. below the 30% mark.
coo khozema shipchandler attributed that slowdown to difficult year-over-year comparisons of its growth in the first half of 2021, but said the company would “see a more favorable set of comparisons” in the second half. Based on those expectations, Shipchandler said the company still feels “about 30% good for the year,” as well as for the next two years.
but twilio still has some fundamental problems
If twilio can grow its organic revenue by more than 30% over the next three years, then its stock will still look cheap at five times this year’s sales.
however, the abrupt resignation of twilio’s chief revenue officer, marc boroditsky, which was announced during its first quarter earnings report, raises some additional concerns about that bullish long-term goal.
if we look under the hood, we will find two other weaknesses. First, twilio’s dollar-based net expansion rate (dbner), which measures its revenue growth per existing customer, has been steadily declining over the past year. you’ll probably need to get more active accounts to make up for that slowdown.
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Second, its adjusted gross margins have declined. That compression can be attributed to new wireless fees that are now charged whenever third-party apps access a carrier’s network, as well as a greater mix of lower-margin international revenue. competition from messagebird, nexmo and bandwidth could also be limiting twilio’s pricing power.
data source: twilio. *adjusted basis (no gaap).
twilio still claims it can expand its adjusted gross margin above 60% in the long term, but that could be difficult to achieve as its growth in active accounts and dbner cools.
also believes it can achieve annual operating profit, based on non-generally accepted accounting principles (GAAP), beginning in 2023.
But the gap numbers are still ugly: Its net loss widened from $491 million in 2020 to $950 million in 2021, then widened again from $207 million to $222 million in the first quarter of 2022. 17% of your income during the quarter.
is it the right time to buy twilio?
twilio faces some challenges in the short term, but I think its downside is limited at these levels. its experts also bought seven times as many shares as they sold in the last three months, which is an encouraging sign in this challenging environment for unprofitable tech companies.
If twilio stabilizes its organic growth and gross margins in the second half of the year, I expect it to return to a higher price-to-sales ratio. therefore, I think investors can nibble on this stock at these levels, as long as they can withstand all the short-term volatility.
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