After a Brutal Q3, Has This Software Stock Bottomed?

Although The Spill will be off for Thanksgiving and Black Friday…

Because we ARE those people who stand in line at 6 a.m…

We wanted to use today to cover a stock that’s too popular for its own good.

Investors hammered growth stocks this earnings season. 

One that’s fared the worst is Twilio (TWLO).

The company’s share price flopped more than 80% year to date.

As we started bottom-fishing for prepackaged software stocks, our proprietary Trackstar sentiment indicator picked up on TWLO, which financial pros have searched nearly 10x as much as they have its nearest competitor. 

Currently this stock is getting more attention than Airbnb, Target, and Beyond Meat. 

Do investors view TWLO as a buy after its big earnings drop, or is there more selling to come? 

Results of our investigation below.  

Twilio’s Business

Twilio offers a global cloud-based communications platform, enabling developers to build, scale, and operate customer engagement with software applications. Some of its biggest customers include Airbnb, eBay, IBM, and Shopify.

The company delivers Communications Platform as a Service (CPaaS), including SMS marketing and commerce communications. 

Additionally, it offers a cloud-based contact center platform.

If you’ve ever booked an Airbnb and received a text notification from that company, it came via Twilio. 

TWLO has more than 280K active customer accounts as of September 2022. 

Investors can feel comfortable knowing that its top 10 customer accounts represent only 13% of its revenues. 

But the firm’s messaging platform accounts for 64% of its total revenue. 

Earlier this month, the firm reported Q3 earnings of $983 million, up over 33% year over year. 

Source: Twilio

However, management guided significantly lower for the next quarter, raising concerns that the company’s growth could be slowing. 

Financials

Source: Stock Analysis

TWLO has a stable balance sheet, with $4.2 billion in cash and $1.25 billion in debt. Its current ratio of 5.7x proves it has ample liquidity to deal with its short-term liabilities. 

Its total assets rose from $449 million in 2017 to $12.99 billion in 2021.

But the firm’s operating cash flow is negative at -$234 million, which is a major drag.

The company has grown substantially over the years. 

Revenues jumped from $399 million in 2017 to $2.8 billion in 2021. And TWLO has generated $3.6 billion in revenues over the last 12 months.  

While those figures are impressive, investors are concerned that the company’s growth will notably decline following the weak guidance it gave after its Q3 earnings call. 

Valuation

Source: Seeking Alpha

TWLO trades at a price-to-sales ratio of 2.2x, notably lower than its peers ZoomInfo (ZI) at 10.7x, Manhattan Associates (MANH) at 10.2x, and Ceridian HCM Holding (CDAY) at 8.2x. However, OOMA (OOMA) is a bit cheaper at 1.7x. 

Historically, TWLO has traded at a price-to-book ratio of 7.7x but is now trading at 0.8x. Its competitors are trading significantly higher, with ZI at 5x, CDAY at 4.7x, MANH at 37.8x, and OOMA at 6.4x. 

But like CDAY and OOMA, TWLO is not profitable. Meanwhile, ZI trades at a P/E GAAP ratio of 62.6x and MANH at 68.7x. 

Twilio has announced it will cut its workforce by 11%, slow hiring, and reduce some of its real estate expenses. These cost-saving strategies are management’s attempt to reach profitability sooner.   

Profitability

Source: Seeking Alpha

TWLO has a gross profit margin of 47.4%, higher than CDAY at 43.6%, but lagging behind its other peers. For example, ZI is at 87%, MANH 52.7%, and OOMA 62.5%. 

One concern investors have is Twilio’s messaging business’ dependence on carrier fees that telecom companies set. Its software business offers a higher margin, but it’s a small segment of the company’s revenues. 

Twilio’s EBIT margin of -30.1% is dismal. Its competitors are doing notably better. For example, ZI’s is 16%, MANH’s is 18.2%, CDAY’s is -0.34%, and OOMA’s is -1.4%. 

Twilio’s net income margin of -36% is brutal compared to ZI at 18.1%, CDAY at -6.5%, MANH at 15%, and OOMA at -0.42%. 

Growth

Source: Seeking Alpha

TWLO has grown revenues by 43% YoY, but its peers have also had double-digit revenue growth, ZI at 53.2%, MANH at 15.8%, CDAY at 23.5%, and OOMA at 12.6%.

Investors are concerned about TWLO because the firm is projecting its Q4 growth to be 19%. Meanwhile, it’s slashed its longer-term growth target from 30% to 15 to 25%.

Our Opinion 2/10

TWLO offers excellent products and services to large-scale businesses. 

But the company’s management has been running the company into the ground and burning cash.

Shares are down 82% YTD. 

Meanwhile, its earnings per share are down 63% this year. 

And now it projects growth to slow. 

As tempting as it looks, TWLO is still grossly overvalued and not investable, despite the haircut it got.