Is Twilio Stock a buy?

Twilio‘s (NYSE: TWLO) The share price plunged to its lowest level in five months after the company released its third quarter earnings report on Wednesday, October 27. Adjusted net income fell 75% to $ 1.8 million, or $ 0.01 per share, but still beats estimates by $ 0.15. Based on generally accepted accounting principles (GAAP), its net loss increased from $ 116.9 million to $ 224.1 million.

Twilio expects its revenue to grow 39% to 40% year-over-year in the fourth quarter, significantly exceeding analysts’ expectations for growth of 36%. He expects non-GAAP earnings to stay in the red.

Image source: Getty Images.

Twilio continues to grow rapidly, but its post-profit slump indicates investors are concerned about its lack of profits and high valuation. Should investors heed these warnings or view its latest pullback as a buying opportunity?

What does Twilio do?

Twilio’s cloud-based platform allows developers to integrate text messages, emails, calls, and other services into their apps with just a few lines of code. For example, it helps Airbnbguests contact their hosts and connect Lyftfrom drivers to their passengers.

Twilio’s approach is disruptive because the developers had previously created these communication features from scratch, which was buggy, time consuming, and difficult to scale. By outsourcing these features to Twilio’s cloud platform, developers can instead focus on improving the core functionality of an application.

Focus on more acquisitions for revenue growth

Twilio has grown like a weed since its initial public offering (IPO) in 2016. Revenue increased 66% in 2016, 44% in 2017, 63% in 2018, 75% in 2019, 55% in 2020 and an additional 65% in one year over the first nine months of 2021.

Its number of active accounts grew from 28,000 at the time of its IPO to over 250,000 at the end of its last quarter. These growth rates are breathtaking, but also depend heavily on acquisitions for new revenue.

Twilio has bought 10 companies in the past six years. Its biggest acquisitions include SendGrid for $ 2 billion in 2018, Segment for $ 3.2 billion in 2020 and Zipwhip for $ 850 million this year.

Excluding Segment and Zipwhip, Twilio’s third quarter revenue would only have grown by 48% organically, compared to its reported growth of 65%. On an organic basis, Twilio plans to increase its annual revenue by at least 30% over the next three years.

Decrease in DBNER and gross margins

Twilio’s acquisitions add new services to its ecosystem, but its Dollar-Based Net Expansion Rate (DBNER) – which measures its revenue growth per existing customer – has declined steadily since its IPO. It finished the third quarter with a DBNER of 131%, up from 135% in the second quarter and 137% a year ago. This rate is still high, but suggests that Twilio’s momentum is gradually waning as the mobile app market matures.

Twilio’s gross margins are also declining. It ended the third quarter with a non-GAAP gross margin of 54%, up from 55% a year earlier. On a GAAP basis, its gross margin fell from 52% to 49%.

This compression can be attributed to two main headwinds. First, some wireless carriers have started charging a Twilio person-to-person (A2P) fee to access their SMS networks. This pressure is squeezing the margins of its messaging services, which were already operating at lower gross margins than its voice calling, email and app segments.

Second, Twilio faces an increasing number of competitors, especially Vonageis Nexmo, Bandwidth, and Message Bird – which could limit its pricing power in the cloud communications market.

Twilio expects its non-GAAP gross margin to reach over 60% in the long run, as it reduces its reliance on the low-margin courier business and expands its other higher-margin services.

Lack of profits and high valuations

Twilio maintains a confident outlook for the future, but its GAAP losses continue to widen as it relies heavily on stock-based compensation to subsidize its salaries and fund acquisitions. This strategy also dilutes its existing actions. It ended the third quarter with 177.2 million weighted average shares outstanding, down from just 86.1 million shares at the end of 2016.

Twilio stock already looks expensive at 23 times this year’s sales, and this continued dilution will make it even harder to cool those valuations.

Is it a good time to buy Twilio?

The company continues to dominate its disruptive niche of the cloud market, but declining gross margins, rising losses, rising stocks and high valuations are hard to ignore. It risks fragmenting its own ecosystem with its constant stream of acquisitions and the imminent departure of its COO George Hu, who previously held the same position at the King of the Cloud. Selling power – raise some red flags.

Twilio is still a solid growth stock, but I’m not sure it’s worth more than 20x this year’s sales. Therefore, I think investors should avoid Twilio for now until it fixes some of its bigger issues.

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Leo Sun owns shares of Salesforce.com. The Motley Fool owns shares and recommends Airbnb, Inc., Bandwidth Inc., Salesforce.com, and Twilio. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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About Aldrich Stanley

Aldrich Stanley

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