Shares of cloud communications platform developer Twilio (TWLO) have been in free-fall for over a year now. Currently down around 77% from its February 2021 all-time high, the once-popular high-tech momentum stock now finds itself closing in on lows not seen since the early part of 2020.
Indeed, Twilio still offers a necessary, easy-to-use service that’s still in demand. With investors turning from high-growth stocks with no profits, Twilio was bound to be one of the victims. Fortunately, the stock is starting to get too cheap for its own good at just 5.9 times sales. We’re reaching an environment where growth stocks are so incredibly oversold that they could be a new class of value plays.
It’s hard to tell when shares of Twilio will finally begin to bottom out. Until investors appreciate unprofitable growth again, it’s hard to imagine any relief for Twilio stock.
These days, the Federal Reserve could not sound any more hawkish. Investors seem to think Fed chairman Jay Powell is ready to rate hike our way into a severe recession. Undoubtedly, when the Fed fans the flame of inflation, it also stands to cool-off economic growth.
The horrid mix of higher interest rates—which are worst for firms that aren’t yet profitable or don’t expect to become profitable in the near term—coupled with a sluggish economy, are the worst for former high-flyers like Twilio.
If rates don’t need to soar high enough to send us into a severe economic downturn, Twilio and other former momentum plays could be in a spot to bounce back quickest. Indeed, it seems like the fate of the 2020-21 class of momentum stocks is in the hands of the Fed. However, Twilio and firms like it continue to invest heavily in innovation.
Eventually, investors will value innovation again, and they’ll probably be more willing to pay a premium. When the time comes, Twilio will likely be a much better company than it was back when it was trading at around $400 per share. The digital transformation is still in play, and although profits could lie further out, today’s depressed multiple seems to severely discount the firm’s incredible sales growth prospects. I remain bullish on TWLO stock.
Twilio Clocks in Quarter of Impressive Growth
Twilio’s first-quarter results saw revenues surge 48% year–over–year. Despite the impressive top-line growth, operating margins retreated by 240 bps to 0.6%. Had rates not been headed higher, the first quarter would have probably been met with applause rather than distaste.
Profitability is at the top of investors minds. So, even extraordinary top-line growth is not enough to move the needle higher if a firm’s margins are fading, distancing itself further from profitability. The messaging business is weighing heavily on margins, but is critical to keeping Twilio’s growth rate elevated.
Though some companies, like Uber (UBER), are pivoting in response to a market environment that favors profits over all else, Twilio still seems focused on investing heavily in innovation and growing its top line. I think that’s the right move. At the end of the day, Twilio is a leading innovator in the cloud communication services scene. If it doesn’t spend to improve itself, a competitor could swoop in and steal the firm’s lunch.
In that regard, Twilio is still standing strong as it looks to add to its suite of solutions. With the digital transformation still very much in play, Twilio still finds itself on the right side of change. It’s hard to tell when investors will appreciate the company’s long-term growth focus again, but management still has its foot on the gas.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, TWLO stock comes in as a Strong Buy. Out of 22 analyst ratings, there are 20 Buy and two Hold recommendations.
The average Twilio price target is $212.35, implying an upside of 106.11%. Analyst price targets range from a low of $120 per share to a high of $320 per share.
The Bottom Line on Twilio Stock
Twilio stock is a hyper-growth play that’s easy for investors to give up on. The business of cloud communications can be pretty difficult to understand. Still, the firm provides invaluable services that power the broader digital transformation trend. It’s not just digital messaging where Twilio shines. Intriguing offerings like contact-center platform Twilio Flex and newly acquired customer-data platform Segment could act as significant sparks for growth.
Margins may not be headed in the right direction today. However, in due time, the firm is in a great spot to tilt towards higher-margin platforms and away from its traditional messaging business.
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