Twilio (NYSE: TWLO) is enjoying an unbroken uptrend that began after the stock bottomed last year in November. The company’s strong quarterly results validate the market’s willingness to assign valuation for its shares. Nearly every analyst covering Twilio stock has a ‘buy’ rating and expect more upside to come. With shares pulling back only slightly from $140 to $133, is Twilio a compelling stock to invest in?
Source: Web Summit Via Flickr
On April 30, Twilio reported revenue of $233.1 million, up a solid 80.6% from last year. It earned $0.05 (non-GAAP), which translates to an EPS GAAP loss of $0.31. Twilio owes its strong revenue growth to Flex getting included for the full quarter.
Flex is a programmable contact center platform. Early adopters in the product are happy with it and will like it more as Twilio adds more features. The SendGrid division is showing signs of early success with satisfied customers. With customers enjoying a wider array of offerings, the five million registered developer accounts is a great achievement.
Twilio for Salesforce (NYSE:CRM) brings its product closer to other big platforms, not to mention adds flexibility and convenience for customers. Expect the company forging many more close relationships with customers to support their applications. This will further drive customer growth worldwide.
Fundamental Growth and Twilio Stock
Twilio’s business model is fueled by a once in a generation opportunity to move customer legacy systems and hardware to Twilio’s software platform. The business growth is a result of a strong sales and marketing team. As Twilio focuses on the enterprise globally, revenue will keep growing at a rapid clip.
In the current second quarter, Twilio will have no trouble reaching a $1 billion annualized revenue rate ($250 million quarterly). Although it is too early to anticipate, the growth rate will eventually slow as the company gets significantly bigger.
As long as the company continues to invest back into the business, the rate of growth will not slow by much. In this scenario, the average analyst target price of $151 is achievable in the next year. Investors could take it a step further and model revenue growth moderating to 20% in a 5-year Revenue Exit. Assuming a revenue exit multiple of 9.5 times, the fair value of TWLO stock is $150.
Progress on New Product Launches
Flex is still on a “version 1” but has the right architecture in place to build features from there. The product appeals to customers because the contact center functions are on the cloud and are fully customizable. The faster Twilio customizes the workflow for customers, the more productive end-users get. And the more fitting the product, the happier customers get.
SendGrid offers timely account notification features that could extend next to SMS. The platform already has 80,000 customers. The product is of strategic importance to Twilio because it added a 300 basis point lift to gross margin in the first quarter.
Though one large international customer skewed that figure, expect gross margins normalizing once Twilio adds companies in the telecom carrier space. Still, supporting multiple campaigns in SendGrid on one platform brings convenience for customers. So, as engagement on the cloud simplifies the process, customers may carry out an omnichannel strategy without much difficulty.
Investors may consider other cloud-based software providers besides Twilio. Okta (NASDAQ: OKTA) has a market cap of $12.51 billion, below Twilio’s $16.91 billion market capitalization. Shopify (NYSE: SHOP) is even bigger with a $30.75 billion market cap. These related firms are bigger for a reason.
On analyst day, Okta outlined its competitive advantage that will ensure its sustained growth momentum. Shopify reported revenue growing 40% in the first quarter to $141 million. Net income more than doubled to $10.3 million.
The Bottom Line on Twilio Stock
Twilio shows no signs of slowing down. The stock is expensive, reflecting the upside ahead for at least the next few quarters. The stock may dip as market selling accelerates but so far, the Nasdaq’s ~7% drop in the last month did little to hurt Twilio’s stock price.
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