- Twilio stock has fallen 11% since its Q3 earnings release, but is showing signs of recovery.
- The average target price of top analysts is $38 a share, 20% higher than its closing price on 10th November.
- Should you buy into TWLO stock now?
Shares of Twilio (NYSE:TWLO), a leading cloud communications company, continued to fall even after the company beat earnings estimates hands down. However, the stock looks set for a rebound in the coming days, backed by strong fundamentals. The average target price of top analysts currently stands at $38 a share, indicating an upside potential of about 20%. While some sections of the market still see TWLO stock as being overvalued, this could be a good buying opportunity for investors who want to buy into the stock. Here’s why.
Upbeat Q3 Earnings, Raised Guidance
Twilio reported an earnings per share of $-0.04, beating Wall Street consensus of $-0.08 by a surprise factor of 50%. While Twilio's earnings were a big highlight, there were also some noteworthy trends around sales growth. Here’s what William Blair equity research had to say on this front:
“Twilio reported strong third-quarter results with revenue increasing 62%, to $71.5 million, $4.3 million above consensus expectations. More importantly, base revenue increased 75%, to $64.1 million, coming in $0.6 million above our estimates of $63.5 million. Management raised full-year 2016 revenue guidance to $268 million-$270 million, which registered nicely above of the Street median of $261.1 million.”
The company maintained an impressive dollar-based net expansion rate (revenue renewal values) of 155% during the quarter .Twilio expects its revenue to rise 61%-62% for FY 2016, compared to 88% growth in 2015. Twilio still isn't profitable, but its non-GAAP net losses narrowed last quarter to $3.4 million, better than their original guidance of $7.5 million to $8.5 million.
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Developer Focused Strategy On Course For Huge Growth Ahead
Twilio has been a disruptor in the Cloud and mobile messaging space. Twilio is still the go-to company for cloud based communication APIs. Though, there are many new competitors like Bandwidth, Nexmo,Plivo and Sinch whose SMS and voice tariffs are much lower than those of Twilio's, it is still way ahead of its peers, and is highly popular among developers. This developer focused strategy helped Twilio add a fortune 100 insurance company to its list of clients in the last quarter. In this case, it was the client's development team which helped Twilio clinch the deal.
Twilio’s 'Solution' partner ServiceNow (Independent Software Vendors (ISV) who build software on top of their platforms) also helped them add a new Fortune 1000 customer. Lately, the company has come up with 'Twilio Enterprise Plans' for their offerings, which will provide more comprehensive solutions to businesses who want it. And Twilio's popularity among developers will aid adoption rates among enterprises, taking the platform to new highs.
In Q3, Twilio added big names like Morningstar, AlliedBarton, The Washington Post and Prudential to its ever growing customer base. Twilio added 3,678 new 'base' (who repeatedly do business with a company) customer accounts during the quarter,with total active customers at 34,449, an increase of 45% year-over-year from 23,822. This healthy customer account growth is a good indicator of the company’s business.
Twilio's Strong Products To Aid Customer Acquisition And Retention
Though Twilio doesn’t give a product-wise breakup of growth, on their earnings call, CFO Lee Kirkpatrick said that Twilio's messaging and voice business were healthy and strong, both in terms of expansion rate (revenue renewal values), and in terms of customers acquisition. The recently launched 'Two-factor' authentication product Authy is also getting great traction. In the earnings call, CEO Jeff Lawson said business from Authy was growing faster than the industry average, albeit off a smaller base.
WebRTC media server, a popular product by Kurento Open Source Project, which Twilio is acquiring, is yet to be added to Twilio’s product line. With Kurento, Twilio will start building programmable media cloud, and launching cloud APIs to do advanced media processing for use cases like larger scale video conferences, media transcoding, recording and storage, and even computer vision and augmented reality. Twilio has high potential revenue streams still in the pipeline. The impressive dollar-based net expansion rate also suggests that existing customers continue to expand usage at a rapid pace for Twilio.
Valuation and Stock Performance
According to its valuation metrics, Twilio stock is not cheap. At a price to sales multiple of 10.71 (TTM), it is still expensive by most standards. However, given its high expected earnings growth of 57.70% next year and the businesses' sound fundamentals it is still undervalued and attractive in our opinion. The stock has been through a rough patch in recent times due to its secondary offering, which hurt the stock last month. However, that has already been priced in, and the stock is likely to rebound soon, given the sound fundamentals of its business. The average target price of the top analysts is at $38 a share, representing an upside potential of 20% from its November 10th close price of 31.5, which appears reasonable, in our opinion. With Twilio presenting at the 2016 UBS Global Technology Conference, one can expect substantial announcements, somewhat on the lines of Twilio's SIGNAL event, which may be good news for the investors.
Being the go-to company for the likes of Uber and Facebook Inc’s WhatsApp to send messages, Twilio has a tremendous growth opportunity. That is, if it can avoid being “disrupted.” Twilio has delivered impressive earnings so far, with revenue growing at 60% on average and losses declining drastically. Twilio’s revenue from 'variable' (non repeating customers) customer accounts was down to 10 %, from 22% last quarter, which is also great sign. While the stock has suffered lately, the company has a strong product line-up and looks set for a great run ahead. At this point, investors need to be a little cautious and patient but Twilio stock is likely to deliver in the medium term. Twilio has plenty to prove before its gets back to its highs, but you just can't ignore the high potential growth and the value it offers. Looking for great tech stocks to buy? Check out Amigobulls' top technology stock picks which have beaten the NASDAQ by over 107%.