Twilio: Losing Revenue Growth, Lofty Valuation Spells Trouble

Twilio (NYSE: TWLO) provides a cloud communications platform that allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions using its web service APIs (Application Programming Interfaces).

The company was incorporated in 2008, and is headquartered in San Francisco, California.

I am bearish on TWLO stock. The company is unprofitable, and sales growth in the first nine months of 2021 has slowed down. As investors and traders return after the Stock Market Holidays, high volatility is expected for this technology software company as the S&P 500 is near all-time highs.

TWLO stock is a classic example of a growth stock that trades at elevated prices and valuation in the Communication Services sector. Investors have taken notice of this lofty valuation as the stock underperformed in 2021 with one-year losses of approximately 27%.

During 2017, 2018, 2019, and 2020 TWLO stock delivered solid sales growth of 43.88%, 62.92%, 74.52%, and 55.30%, respectively. In Fiscal Year 2021, quarterly sales growth slowed down to 7.64%, 13.38%, and 10.65% for Q1, Q2, and Q3, respectively.

If this loss of momentum in revenue growth continues in Q4 2021, TWLO stock most probably will start 2022 with plenty of volatility.

6 Reasons for Bearishness on TWLO Stock

Starting with a dilution of shares, shareholders have been diluted in the past year, with total shares outstanding growing by 18.1%. In Q3 2021, Twilio reported weighted-average shares of 177 million and in Q3 2020, a figure of 147.5 million.

Second, the firm is losing money with net losses widening over the past five years. In 2016 a net loss of $41.32 million was reported, which grew to a net loss of $490.98 million in 2020.

Third, its operating margin is both negative and getting worse over time. In 2016, the reported operating margin was -13.5%, growing to -28% in 2020.

Fourth, the company is also having a cash burn problem, with negative free cash flow reported for 2016-19, and only a positive number of $7.46 million in 2020.

Turning to a quarterly basis in the first three quarters of 2021, Twilio reported a cumulative free cash flow of ($53.17 million), signaling that the cash burn problem persists.

The fifth reason is that even though an Altman-Z score of 15.05 indicates that Twilio is not in any danger for bankruptcy now, as the Debt/Equity ratio of 0.07 is considered too low, the stock has a very weak Piotroski-F score of 1.00.

This is an indication of health and profitability issues and overall financial strength. Twilio has no liquidity issues now, but its profitability trend shows that overall, its business model is not efficient, at least for investors who focus not just on growth but also on valuation metrics.

Sixth, the valuation of Twilio shows mainly two things. Compared to an average industry price-to-book ratio of 4.95, TWLO is valued in line with its industry peers as the stock has a price-book ratio of 4.05. It seems to be even relatively undervalued.

On the other hand, I argue that TWLO is overvalued now turning to forward valuation metrics. It has a forward P/S value of 16.9, higher than the Information Technology Sector median value of 4.18.

TWLO earnings are highly volatile, a trend that is expected to continue in 2022.

Wall Street’s Take

Twilio has a Strong Buy Consensus based on eighteen Buys and only one Hold ratings. The average Twilio price target of $421.76 implies 71.09% upside potential.

Twilio has been a textbook case of growth stock for several years. It is struggling to turn profitable, has a serious cash burn problem and stock dilution has made its valuation worse. Until a major financial performance improvement occurs it is a too risky and expensive stock in 2022.

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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.