Twilio (NYSE:TWLO) is having a tough time pulling back from the tech wreck of 2021. The cloud communications platform as a service posted strong quarterly results. Active customer accounts grew. Investors of TWLO Stock, however, are in for a big surprise.
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The company initiated fourth-quarter guidance, which included non-GAAP losses. Since November, investors of TWLO stock faced downward selling pressure after investors shunned high valuation stocks. Despite the volatility, why is Twilio a compelling worthwhile long-term investment?
TWLO Stock Under Pressure
Twilio announced third-quarter revenue of $740.2 million. Losses almost doubled from $112.3 million last year to $232.3 million. Still, on a non-GAAP EPS basis, it earned a penny, or $8.2 million. Even after losing 10% of its value in the month and 40% from 52-week highs, the market capitalization is almost $50 billion. Investors are nervous that the small profit will not rise in the coming quarters.
Fortunately, Twilio’s quarter revenue is growing consistently in the low 60% range. Revenue growth of 46% in Q2/2020 (slide 5) is a low point. Given the increasing uncertainties from Covid-19, markets are worried that Twilio’s business growth may lose momentum. Omicron is confusing investors. They are not sure that business customers will face a slowdown. That would hurt Twilio’s strong active customer account growth.
In Q3, Twilio’s dollar-based net expansion rate fell slightly, from 137% in Q3/2020 to 131%. After it acquired Zipwhip and Segment, completed in July 2021 for $850 million, its communications platform should attract growth.
Simon Khalaf, SVP and general manager of the Twilio Communications Platform, said that Zipwhip would leverage Twilio’s messaging expertise across its channels. The unit will suit customers of all sizes since they will get a suite of messaging offerings.
Last year, Twilio acquired Segment. It wrapped up the $3.2 billion purchase quickly. Segment adds developer tools to the platform. Twilio benefits from having a set of communication APIs (application programming interfaces). Segment focuses on interacting with customers and managing that data.
Opportunity For TWLO Stock
Twilio will sustain organic growth of at least 30% or more in the next three years. It has broad exposure geographically. Segment demonstrated strong quarterly performance. This gives management the confidence that its business momentum will continue.
The company has a vision of becoming a leading customer engagement platform. It will get there by following its product roadmap in the next few years. It has plenty of cash on hand ($1.497 billion as of Sept. 30, 2021) for mergers in acquisitions. After a few big purchases in the last year, Twilio will take its time to acquire other firms to fuel growth.
Since company targets still trade at premiums, Twilio will be selective about its opportunities. It has a solid technology stack. It will pursue any outside solutions that add to the platform at the right price. For now, the firm will capture more of its addressable market by providing digital transformation solutions for customers.
In 2022, Twilio will turn its attention to developing its customer engagement platform. This includes growing customer awareness for Twilio Engage. This is an omnichannel growth platform. Customers may build and optimize marketing campaigns using its tools, analytics, and data integrations.
Apple’s advertising identifier advertisers, called IDFA, may potentially limit a customer’s view of data. Still, Twilio believes it will provide the antidote to IDFA tag changes. For example, its customers will have first-party signals from customers as opposed to third-party data.
At a macro level, the company will help its customers grow its relationships with their customers. Business customers have not only Twilio’s messaging products but up-sold products like Segment. In 2022, its general availability rollout will lift revenue and profit margins.
Downtrend Chart and Fair Value
In the chart below, Twilio stock is still working off bearish selling volume. It faces resistance at the 50-day and 200-day simple moving average.
Twilio stock chart is bearish. The MACD is in a downtrend with the stock price.
On Wall Street, 18 out of 19 analysts rate TWLO shares as a buy. The price target ranges from $350 to $550, according to Tipranks. The analyst support for Twilio’s prospects could lead to buyers returning to the stock early next year.
Over-priced software stocks are in a bear market. Twilio is a marketing and communications platform that posted its first quarterly revenue. After adding new features and rolling out the improved solution in 2022, growth could expand. Investors should keep this stock on the radar.
Investors cannot time when the selling pressure will end. Look for the widely-held value software stocks to rebound first. If the Nasdaq accompanies that uptrend, TWLO stock recovery will soon follow.
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 x 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.