3 Reasons Why Twilio Is Enticing Buyers

Some of the most popular apps are, at their core, simply about connecting users with one another. Uber, DoorDash, Airbnb, and many others fall beneath that umbrella, and their accelerated adoption over the past few years has made them commonplace.

But connecting users through an app, even something as simple as sending a message to your Lyft driver, can be much more difficult than it seems. That’s where companies like Twilio (NYSE: TWLO) have stepped in, providing cloud-based communication solutions for some of the most popular apps in the world.

Twilio stock was very popular at the turn of the decade, jumping from a low of around $80 in early 2020 to over $435 just one year later. But the stock has been on a steady downward slide since then, down to where TWLO currently trades closer to $50 per share.

The share price slide has been mainly attributable to stagnation in revenue growth. Even after a positive 2nd quarter of 2023, Twilio was unable to re-ignite the sales growth of previous years. But after the drastic price decline and the company’s healthy market share, some investors are starting to wonder if TWLO is oversold.

So is Twilio stock undervalued?

Twilio Eclipsed Analysts Estimates

The second quarter of 2023 was headlined by revenue of $1.04 billion, a 10% year-over-year increase. More importantly, that was also over 5% above the levels analysts forecast.

The good news also included 10% organic revenue growth over the same time period. Total active users increased 10.5% from 275,000 in the 2nd quarter of 2022 to 304,000 this year.

One reason for the outperformance stems back to Twilio’s decision to split operations into two segments early this year, Communications and Data & Applications.

The Communications segment includes the company’s main product lines, messaging solutions, and brought in $913.1 million in the 2nd quarter, a 10% increase from last year.

The Data & Applications segment includes solutions that allow Twilio customers to engage their users more effectively. This segment had sales of $124.6 million in the 2nd quarter, a 12% increase year-over-year.

3 Reasons Why Twilio Is a Good Investment

A key attraction to Twilio stock is its operating margin. After a couple of years of shrinking margins, Twilio took measures to cut costs and the initiative appears to be working well because the adjusted gross margin is up 1% over the past year.

Not only did Twilio improve its margins by laying off employees but it also divested unprofitable ventures. This year, Twilio sold its Internet of Things business and India-based ValueFirst to consolidate operations.

Another sign that Twilio may be on the rise is the Board’s recent decision to buy back $1 billion of TWLO stock. So far the company has repurchased $500 million in stock and it intends to buy back $500 million more by the end of 2024.

A third, and perhaps the most compelling reason to invest in Twilio is that it is trending toward profitability. The company’s GAAP net loss in the 2nd quarter was $166 million, a nearly 95% improvement over the $323 million net loss from last year.

Is Twilio Stock Undervalued?

For those reasons, investors and analysts alike are starting to come around to the merits of owning the stock. Out of 36 analysts who have weighed in on TWLO, 17 rate it as a Buy and 17 consider it a Hold.

Two of the most bullish analysts forecast that it will outperform the market and could rise as high as $110 per share over the next year, a nearly 115% improvement.

The median forecast is still quite positive, projecting that Twilio shares will jump 31.7% over the next 12 months to $67.50. There are still skeptics, though, with 2 Sell ratings on the stock. The most bearish analyst sees TWLO underperforming the market and dropping by 2.5% to $50 over the next 52 weeks.

Twilio is 52.5% undervalued according to the consensus price target of $68.24 per share of 30 analysts. The company’s Price-to-Sales ratio seems to validate that forecast, sitting at just 2.3x.

Risks to Consider Before Investing

The largely positive news during the 2nd quarter had little effect on the stock’s price with TWLO share price trading nearly even year-to-date, however during the month of October, TWLO stock fell by 12.5%.

The main reason why Twilio has continued to decline is over concerns about its future growth propsects. Revenue that was growing by 60% in 2021 and 35% in 2022 is now only expected to reach around 6% growth by the end of the year.

While the company’s leadership and industry experts believe that 2024 will be a better year for the industry as a whole and for Twilio in particular, there is still a significant risk that revenue slowdowns will persist.

A further concern is that companies like Vonage, Plivo, and Bandwidth will compete aggressively with Twilio and win market share. While not all of those companies are publicly traded, an IPO would result in a capital raise that could provide the liquidity infusion needed to compete more substantially.

The Future of Cloud Communications

The future of cloud communications, like most tech segments, will certainly include AI. To that end, Twilio has rolled out its CustomerAI platform, which is intended to provide customers with better authentication and engagement methods. 

Still, it remains to be seen whether Twilio can keep its stranglehold on the market. At last count, it had 38% share of the CPaaS market with Rest its closest competitor, taking 30% share and Vonage in third place with 11.8%. The company was able to capitalize early on a high-demand niche for many up-and-coming apps. But the jury is still out on whether that will be enough to see it through the coming years.

That uncertainty is what’s keeping many investors on the sidelines with Twilio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.