2023-04-24 08:04:28 ET
Summary
- Twilio has bounced from the lows but remains 50% lower than even pre-pandemic levels.
- Growth has decelerated meaningfully into the mid-teens rate.
- Management has increased their focus on profitability with GAAP profitability targeted for 2027.
- Net cash makes up around 25% of the market cap.
- TWLO stock is still very cheap here as management executes against targets.
Twilio ( TWLO ) is still trading 50% below pre-pandemic levels, and that is after a solid rally from the recent bottom. The company has seen growth rates decelerate meaningfully as investors digested the retraction of management’s prior guidance for 30% growth over the medium term. Yet bright shoots have emerged, with management showing an increased focus on driving margin expansion and profitability. While TWLO is likely to face headwinds to growth over the near term, the stock remains highly buyable as investors await further recovery in tech sector valuations.
TWLO Stock Price
It is safe to say that TWLO will not be returning to all-time highs any time soon, though one must wonder if TWLO stock should be trading more than 50% below pre-pandemic levels.
I last covered TWLO in January where I called it a diamond in the tech sector. The stock has since returned 13% but has more room to run as Wall Street comes to appreciate the aggressive margin expansion in the tough macro backdrop.
TWLO Stock Key Metrics
In its most recent quarter, TWLO delivered 21% organic revenue growth, a far cry from the 30+% growth rate of the past many quarters.
The main issue was the deterioration in dollar-based net expansion to just 110%. Because TWLO derives the bulk of its revenue on a usage-basis, it is more prone to cyclicality than other tech stocks.
TWLO ended the quarter with $4.1 billion in cash versus $1 billion in debt for a $3.1 net cash position, making up over 25% of the current market cap.
Looking ahead, TWLO is guiding for just 15% YOY revenue growth in the first quarter but is guiding for up to $350 million in non-GAAP operating profit for the full year (which may translate to around $450 million in non-GAAP net income after accounting for interest income). TWLO is also targeting GAAP profitability for the 2027 year.
In conjunction with the intense focus on profitability, management announced a $1 billion share repurchase program which looks quite feasible considering the sizable net cash on the balance sheet. On the conference call , management reiterated their medium term guidance of 15% to 25% revenue growth with projected 30% software revenue growth. Management noted that their cost savings initiatives should lead to around $300 million in run-rate savings, lending confidence that they can hit their profitability targets “in any cycle.” All of the profits are expected to come from the communications business as the software business is expected to be a drag on earnings in the near term. TWLO has split up its sales teams into different units - one focused on the communications business and other focused on the software business in order to differentiate the different goals of profitability and growth.
CEO Jeff Lawson stated on the conference call that he intended to purchase $10 million in stock following the end of the blackout period and he made good on that promise as he purchased $10 million on February 27th .
Is TWLO Stock A Buy, Sell, or Hold?
The bursting of the tech bubble has led to a reset in expectations and valuations. Whereas TWLO had previously been trading at around 25x sales with growth rates in the 35% to 40% range, TWLO is now trading at under 2.5x sales with projected mid-teens forward growth.
TWLO is now expected to drive significant operating leverage over the coming years.
While the lower growth rates in part justify a lower valuation, I can see valuations recovering as management delivers against profitability targets. Moreover, if management does embark on its share repurchase program then that may also reiterate the message that they are now more focused on profits and shareholder returns. Based on 18% forward growth (near the low end of medium term guidance), 20% long term net margins and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see TWLO trading at 5.4x sales, representing a stock price of $120 per share.
What are the key risks? TWLO may see disappointing growth rates due to the tough macro environment. It is possible that even the reduced medium term revenue guidance proves too aggressive. It is also possible that the decelerating growth rates are not due to the macro environment but may persist even after a broader recovery. TWLO’s gross margin is below 50% and significantly lower than the typical tech company. This may make it difficult to realize operating leverage and execute against management’s profitability targets. I continue to view a basket of undervalued growth stocks as being a top strategy to position ahead of a recovery in the tech sector. TWLO fits right in with such a basket, offering rapid margin expansion at a competitive price - I reiterate my buy rating.
For further details see:
Twilio: 50% Below Pre-Pandemic Levels, Now Focused On Profitability