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Why You Should Be Buying This Top Cloud Stock

Harsh Chauhan, The Motley Fool

Twilio's (NYSE: TWLO) second-quarter report turned out to be another blockbuster. The cloud communications specialist delivered yet another quarter of accelerating growth and hit $1 billion in an annualized revenue run rate for the first time.

But investors didn't seem too happy with the results. The stock slid after the report was released, which was surprising given that Twilio didn't put a single foot wrong during the quarter.

Buy, sell, and hold written on three sides of a die.

Image source: Getty Images.

Investors have made the wrong move

Second-quarter revenue was up 86% year over year to $275 million thanks to a full quarter's worth of revenue from SendGrid, which Twilio acquired last year. The revenue was well ahead of the $264 million Wall Street forecast. Meanwhile, adjusted earnings of $0.03 per share were better than analysts' estimates by a penny.

Still, investors seemed to think that it would be prudent to book profits and sell the stock. That thinking makes some sense, as shares are up more than 70% over the past year at the time of this writing. But it doesn't make sense given that there are no signs of trouble at the company.

These signals tell us Twilio remains a top pick

Twilio's top-line growth has accelerated for eight quarters in a row thanks to a rapidly increasing customer base and a spike in customer spending. The story continued this time as the number of active customer accounts shot up from 57,350 in the year-ago period to 161,869 in the second quarter.

SendGrid was the biggest catalyst behind this massive jump, as it brought 84,000 customers. But these new customers will be more than just a one-hit wonder for Twilio and will help the company achieve sustainable long-term growth as the SendGrid acquisition gives Twilio a new universe of customers to whom it can pitch its existing services. Moreover, the existing customers of the company can choose to buy SendGrid's services.

Investors can easily find out if such cross-selling activity is indeed happening by looking at Twilio's dollar-based net expansion rate, which indicates how sticky Twilio's products and services are with customers. The dollar-based net expansion rate measures how much money a customer spends from year to year; the further over 100%, the better.

Twilio says that its second-quarter dollar-based net expansion rate was 140%, up slightly from the prior-year period's increase of 137%. Investors should note that this jump is exclusive of the SendGrid acquisition. CFO Khozema Shipchandler clarified on the latest earnings conference call that the increase in the dollar-based net expansion rate will not be impacted by SendGrid this fiscal year: "This is being driven by our investment in our go-to-market teams, and our ability to drive success across our customer base with the expansion of current use cases or the delivery of new use cases."

SendGrid operates in the fast-growing email marketing space that is expected to hit $22 billion in revenue by 2025 versus $4.5 billion in 2017, according to Transparency Market Research. This was a smart acquisition by Twilio that should entice its customers to spend even more.

This is probably the reason analysts expect Twilio's earnings per share to more than double in fiscal 2020, which would be much better than this year's projected jump of around 36%. So it would be prudent for investors to hold on to Twilio stock, since it has the potential to go higher on the back of stronger earnings power and further acceleration in its sales.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twilio. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com