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Why Twilio Stock Can Keep Running Higher

Luke Lango

Alongside the rest of the market, shares of hyper-growth cloud-communications company Twilio (NASDAQ:TWLO) dropped sharply in May. As a result of the broader weakness, Twilio stock now trades at roughly 15% off its 2019 highs.

Despite market noise, Twilio stock remains fundamentally viable

Source: Web Summit Via Flickr

Ostensibly, this selloff makes sense. The global economic growth picture is deteriorating thanks to rising international trade tensions. As that narrative sank, financial market conditions have become less favorable for growth stocks. Unquestionably, that characterization describes TWLO stock. As such, it makes some sense that shares are down big over the past few weeks.

But upon closer inspection, the selloff actually doesn’t make that much sense.

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The factors dragging financial markets lower aren’t really relevant to Twilio. Instead, TWLO stock is just falling in sympathy with the market and its fellow growth stocks. In actuality, the growth trajectory here remains exceptionally favorable for the long haul.

To be sure, the valuation on Twilio stock is stretched here. It is not unreasonable to see shares fall to rational levels. But I want to emphasize that this selloff is temporary.

Once the valuation comes in some, investors will realize the same fundamentals that initially catapulted TWLO stock remains intact. Therefore, you can expect shares to rebound substantially, getting back to its winning ways.

The Negatives Against Twilio Stock Are Overstated

Right now, the market is lumping Twilio stock into a basket of high-growth equities vulnerable to mass-scale shifts. But that sweeping categorization is inappropriate.

There are four factors which are weighing on equities at the current moment: rising trade tensions, a slowing global economy, low interest rates and the threat of government regulation. None of these factors apply in a harmful way to TWLO stock.

On the trade front, Twilio is largely exempt from the threat of tariffs since this is a services company with a primarily domestic growth narrative. Tariffs on imported products are largely meaningless for Twilio.

Meanwhile, while higher tariffs could reduce economic growth globally, cloud companies like Twilio could benefit in a slower growth environment. That’s because they are low-cost solutions which enterprises could increasingly turn to when rethinking budgets and corporate spend.

With respect to plunging yields, low interest rates actually help hyper-growth stocks with outsized valuations like Twilio by making their returns look relatively more attractive. Lastly, while big tech companies are under the regulation microscope, Twilio is far from being big or dominant enough to warrant any regulatory attention.

All in all, then, the potential risks to the Twilio growth narrative and TWLO stock are presently overstated.

The Core Growth Narrative Remains Healthy

Looking past the overstated risks, the core growth narrative supporting Twilio stocks remains as healthy as ever. Indeed, it might even be healthier.

In late April, Twilio reported jaw-dropping first-quarter numbers that underscored the strength of this company’s secular revenue engine. Sales growth exceeded 80% year-over-year. Core revenue growth was closer to 90%. Customers more than doubled YOY. Gross margins remained well north of 50%. Operating leverage kicked, and an operating loss in the year ago quarter turned into a profit this quarter.

Broadly, the numbers were really good: Big revenue growth combined with big customer growth. Stable and outsized gross margins. Falling opex rates. Ramping profits. All the boxes were checked off.

Zooming out, all those boxes should continue to be checked off for the foreseeable future. Businesses are increasingly seeking to differentiate their customer experiences. An important part of that differentiation is the ability to communicate dynamically and in real time with customers through the mobile channel. Twilio enables this communication. Sure, there are lots of competitors in the space. But Twilio’s growth rates imply that there aren’t any competitors quite as good.

This space is still relatively small today. Twilio only has about 155,000 customer accounts. There are over 30 million businesses in the U.S. who could use Twilio’s services. Additionally, more than 100 million international firms could benefit. As such, this growth narrative is in the top of the first inning. As the game plays out over the next several quarters, growth rates will remain large and profits will surge higher.

Most importantly, Twilio stock will get back to its winning ways.

Bottom Line on TWLO Stock

The market is having trouble right now because rising trade tensions threaten economic growth globally. But Twilio is one of the few growth stocks that doesn’t have much exposure to these trade risks. Therefore, the growth narrative here will remain healthy. As the numbers prove this over the next few quarters, Twilio stock should bounce back from its recent selloff.

As of this writing, Luke Lango was long TWLO.

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