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Twilio Stock in a Tailspin; Looks Attractive
Stock Analysis & Ideas

Twilio Stock in a Tailspin; Looks Attractive

Twilio (TWLO) stock is in a tough spot right now, with shares down almost 30% from their February 2021 peak at $435 and change. At around 20 times price-to-sales, shares of the cloud communication platform provider still seem expensive.

Still, relative to its growth prospects, which are still intact, shares may not be expensive enough, especially given the market’s willingness to pay up for growth. As such, I remain bullish on Twilio stock despite the negative momentum and management’s mixed fourth-quarter outlook. (See today’s best-performing stocks on TipRanks)

Twilio Tumble Seems Overdone

Although significant headwinds could weigh TWLO stock down even further over the medium term, investors shouldn’t discount the company’s robust portfolio.

Moreover, Twilio is still experiencing strong secular tailwinds that should drive demand for Twilio’s services for many years to come. The very niche Communications-Platform-as-a-Service (CPaaS) space may not be the most exciting place to be in for investors these days. Still, it is a market with a long growth runway, and Twilio has the ability to take a huge share and run with it.

When many investors think of Twilio, they may think of messaging. Twilio makes it easy for businesses to communicate with their customers by such means. While the messaging business is a vital part of Twilio’s business, it’s not the reason to get behind the stock as it continues tumbling.

Messaging products can be quite commoditized, and margins aren’t the greatest. Fortunately, Twilio has made big moves in the space to acquire and develop innovative new products that go well beyond just text messages. Such products can apply upward pressure on margins and help Twilio fuel its next leg of growth.

Twilio Engage: A Compelling Growth Catalyst?

Recently, the company pulled the curtain on Twilio Engage, a product that should re-engage investors into the name.

Twilio Engage, which builds on the recently-acquired customer data platform (CDP) Segment, allows prospective clients to take their business-to-consumer (B2C) engagement to the next level.

Engage is a data-driven growth automation platform. Like so many other SaaS (Software-as-a-Service) products, it may be capable of adding enough value such that it essentially pays for itself and then some.

Unless you work at a business within such a target market, it’s tough to fathom the type of growth to be had from Twilio’s Engage platform. Data is quickly becoming one of the most precious commodities out there. When first-party customer data is leveraged appropriately, firms can win more business at a lower cost. Indeed, the offering could drive continued growth and potentially attract new customers to its existing line-up of offerings, including messaging.

Undoubtedly, Twilio is building a more comprehensive suite of business technologies, one that will be tough for the competition to match. Surely, upselling opportunities could be enormous.

As investors fret over the last mixed-bag of a quarter and the underwhelming fourth-quarter guidance, they would be wise to consider buying the dip if they seek a growth stock at a somewhat reasonable price tag.

Wall Street’s Take

Turning to Wall Street, TWLO stock comes in as a Strong Buy. Out of 18 analyst ratings, there are 16 Buys and two Holds assigned in the past three months.

The average Twilio price target is $426.25, implying 37.2% upside potential. Analyst price targets range from a low of $350 per share to a high of $550 per share.

The Bottom Line on Twilio Stock

Twilio’s revenue grew at a compound annual growth rate (CAGR) of 64% over the past three years. Such growth will be harder to sustain over the next three years, especially as organic growth starts to slow. That said, incredibly innovative products such as Twilio Engage could still allow for some very impressive high double-digit growth.

Moving forward, Twilio’s strategy of building on acquired technologies within its corner of the SaaS market could be a key driver of the stock. For that reason, Twilio’s recent pullback should have investors giving the name a second look, even if broader market pressures continue to weigh most heavily on the fastest-growing stocks.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

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