TWLO – Fin Pros Might Be On To Something

Bubbles make it difficult to see good companies amidst the chaos.

So, when Twilio (TWLO) crashed +85% from its all-time highs, retail investors forgot about the stock…

…but not financial pros.

According to our TrackStar search volume, they’ve had their eye on the stock for some time.

And its latest earnings drew more eyeballs to the stock when it delivered a surprising quarterly profit.

Here’s why…

Twilio’s Business

Before Twilio, if you wanted any time of communication in your app, it required custom development, and thus $$$.

Twlio’s APIs allow developers to embed voice, messaging, video, and email directly into apps.

Plus, their programmable communication allows users to scale the way they want, meeting their security and compliance needs.

With their SaaS model, Twilio allows customers to pay as they go.

Twilio’s latest quarterly report for Q2 2023 showcased strong growth and profitability, with revenue reaching $1.01 billion, a 15% increase year-over-year. The acquisition of Zipwhip, a business texting platform, contributed to this growth. 

The report also highlighted a non-GAAP operating income of $103.8 million, reflecting improved efficiency. However, the quarter also saw a GAAP net loss per share of $1.84, including expenses associated with restructuring. 

Investors worry slowing growth may be here to stay. After years of +30% revenue growth, forecasts put this year at just 16.7%.

Source: Twilio Q2 ‘23 Earnings Deck

Financials

Source: Stock Analysis

Twilio generated $83.6 million in cash from operations last quarter, its first positive cash quarter since Q3 ‘21.

SG&A expenses have dropped dramatically since then to 40.8% of revenues compared to 53.1%, while gross margins slipped by 1%.

In 2020, Twilio was cash flow positive the entire year, largely due to managed SG&A costs and higher gross margins.

The company laid off 25% of its workforce but needs to do more to improve its margins.

However, the company has net cash of $2.5 billion, meaning it’s got more cash than debt, giving it plenty of room to invest in improvements.

Valuation

Source: Stock Analysis

While TWLO doesn’t generate a GAAP profit, neither does its peers.

However, they generate positive cash flow, so everyone from Shopify (SHOP) to Okta (OKTA) trades at a higher price-to-sales ratio.

Growth

Source: Seeking Alpha

Additionally, all TWLO’s peers, especially Cloudflare (NET), are forecasting revenue growth over 20% this year.

But if you look at the last few years, they all have relatively similar average annual revenue growth.

Profitability

Source: Seeking Alpha

TWLO and SHOP have the lowest gross margins compared to NET, MongoDB (MDB), and OKTA.

But since none of them are profitable, that’s the only margin where they’re positive.

Our Opinion 5/10

While Twilio is on its way to becoming solidly profitable, it’s not quite there.

Plus, growth is on the decline, so they’ll need to find a way to improve their business as is.

We would rather invest in its peers where growth and cash flow exist.

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