2023-09-27 12:36:11 ET
Summary
- Twilio's growth rates have declined after experiencing massive growth due to Covid-related demand.
- The company expects generative AI to drive its next growth cycle in 2025, but the market is skeptical.
- The stock trades below 2x EV/S targets despite forecasts for revenue growth returning to 15%+ rates.
After years of massive growth with some demand pulled forward due to Covid, Twilio ( TWLO ) has seen growth rates completely erode. The communications software company expects generative AI to lead the next growth cycle in 2025, but the market doesn't believe the growth targets with the stock in the $50s. My investment thesis remains a Bullish, though the company needs to prove out the growth catalysts before loading up on the stock.
Source: Finviz
Covid Depression
The combination of several major acquisitions and Covid demand pull forward left Twilio reporting a 50% revenue growth rate as recently as Q4'21. The company still topped 40% in Q2'22.
Twilio entered Covid with quarterly revenue having just topped $300 million while the recent June quarter topped $1 billion. The communication company has dramatically changed during this period with revenues tripling, yet the stock has dipped from $100 to nearly $50 now.
The catch for investors is that Twilio only guided to Q3 revenues of $985 million with possibly zero growth. The organic growth will only hit 3% to 4% after the company divested a small business.
AI To The Rescue
On the Q2'23 earnings call , CEO Jeff Lawson highlighted the benefit of the data assets of the communications platform when combined with AI:
In June, we previewed our vision for CustomerAI, which we have designed to layer predictive and generative AI capabilities across our platform at every customer touch point. As I shared last quarter, I believe the real value unlock for artificial intelligence will be pairing large language models with first party data sets. We believe this is where Twilio is most differentiated through our data asset segment.
While the CEO told a great story about generative AI being a big catalyst for customer communications to where workforces in the customer contact center can be slashed, the enterprise AI software market has been very slow to develop. The CustomerAI product will take a while to drive sales growth.
With Twilio reporting 10% growth in the last quarter, anyone loading up on the stock here is trying to time the bottom of the business cycle. The company has a tradition of smashing quarters estimates, but the current expectations are for the trend to get worse in the December quarter before the eventual ramp back up.
Twilio is forecasting Medium Term growth rates returning to the 15% to 25% level, which are meaningful considering annual revenues have now topped $4 billion. The company defines the Medium Term as fiscal years 2025 to 2027.
In essence, Twilio is ~5 quarters away from returning to 15% growth. The company will have to ramp revenue growth back up to 5% and 10% in the process to reach that sales growth target.
The stock doesn't trade as if the company is returning to such growth rates. Twilio pretty much trades as if no growth even exists anymore at a forward EV/S multiple below 2x due to a net cash balance of nearly $2.7 billion.
An investor buying the stock here only needs Twilio to return to 5%+ growth for the stock to rally. The company has vastly improved the financials via laying off 27% of the workforce making the slow growth more tolerable now.
Twilio forecasts up to $400 million in operating income, leading to solid cash flows when the business returns to 15%+ growth. The stock has solid risk/reward here, though the company still has to prove the business can be turned around and that customers will need their generative AI products.
Takeaway
The key investor takeaway is that Twilio is a generative AI play without the pricy stock valuation. If the company hits sales growth targets by 2025, the stock has substantial upside via multiple expansion. If the company fails to grow, Twilio likely just languishes in this area due to the large cash balance and slightly profitable business.
Investors should use the current weakness in the stock to build a position for the AI push going into 2024.
For further details see:
Twilio: Market Doesn't Believe