Shares of Twilio (NYSE: TWLO) went public back in mid-2016 and have returned over 1,000% to investors in cumulative gains, easily outpacing the broader markets. However, TWLO stock is also down 30% from all-time highs allowing investors to buy the dip. Let’s see why I remain bullish on the long-term prospects of Twilio right now.

 

How did Twilio perform in Q3?

Twilio provides a cloud-based communication platform for developers allowing them to easily integrate messages, calls as well as emails into their applications. You might have used its messaging platform while booking a short-term rental on Airbnb (NYSE: ABNB) or connecting with a driver on Lyft (NASDAQ: LYFT). Twilio provides a disruptive solution to enterprises that previously had to build communication platforms from scratch which is expensive, time-consuming, and difficult to scale. 

In the third quarter of 2021, Twilio reported sales of $740.2 million which was an increase of 65% year over year. Its revenue surpassed Wall Street estimates by $56.1 million. Its adjusted net income fell by 75% to $1.8 million or $0.01 per share which was $0.15 higher compared to consensus estimates. On a GAAP basis, the company’s net loss widened to $224.1 million in Q3, from $116.9 million in the year-ago period.

In Q4, Twilio forecasts sales to rise around 40% year over year, higher than Wall Street estimates of 36%. While Twilio is growing at an enviable pace, investors are worried about the company’s negative profit margins and steep valuation which triggered a sell-off in recent trading sessions.

 

Twilio is focusing on acquisitions

In the first nine months of 2021, Twilio sales have risen by 65% year over year. Its top-line growth has been stellar over the years as revenue has grown by 66% in 2016, 44% in 2017, 63% in 2018, 75% in 2019, and 55% last year. The company has in fact managed to expand its customer base to 250,000 at the end of Q3, from just 28,000 during its IPO.

Twilio has acquired 10 companies in the last six years. Some of its largest buyouts included SendGrid for $2 billion, Segment for $3.2 billion, and Zipwhip for $850 million. These acquisitions have been highly accretive as Twilio’s sales would have risen by 48% in Q3 if we exclude sales originating from Zipwhip. Twilio is confident about growing its revenue at an annual rate of 30% in the next three years.

 

TWLO needs to improve profit margins

Twilio ended Q3 with a dollar-based net retention rate or DBNER of 131% which is lower than the DBNER of 137% in the year-ago period. While the metric suggests existing customers continue to increase spending on the Twilio platform, it also indicates the company is losing momentum in the mobile market that is maturing rapidly.

Twilio also reported a gross margin of 49% in Q3 compared to 52% in the year-ago period. Twilio explained that wireless carriers are now charging the company application-to-person fees to access SMS networks. Further, rising competition in the cloud-communications market has also limited the company’s pricing power. However, Twilio expects gross margins to move higher over time as it focuses on higher-margin services in the future.

 

What next for investors?

Twilio’s rising losses have meant that the company has diluted shareholder wealth as its share count stands at 177.2 million right now, compared to 86.1 million in 2016. TWLO stock remains expensive and is valued at 23x forward sales despite the recent pullback.

Twilio has successfully disrupted a niche vertical in the cloud market but it’s difficult to overlook falling gross margins, shareholder dilution, steep valuation metrics, and widening losses. But over the long term, Twilio stock is well poised to beat the market on a consistent basis and is a solid bet for growth investors.

Twilio (NYSE:TWLO)
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