Despite Financials, Twilio is One To Watch

Key Points

• Weak sales pushed shares down despite higher revenue and other revenue beats
• The dip is surprising considering how fast their valuation grew
• Persistent losses obfuscate earnings but analysts still think it will turn around
• Hence analysts give it a HOLD rating 

Twilio, Inc. (NYSE: TWLO) stock slipped 25.1% in premarket action, last week, after posting sales numbers that were weaker than expected. All of this despite the fact the cloud-based communications software firm also posted revenue is up 33% over the last 12 months, to $983 million beating analysts' expectations by $11 million.

The new outlook cast a pall over what should have been better news: quarterly losses smaller than expected with revenue that surpassed analyst estimates. This is why analysts have given TWLO a HOLD rating (leaning towards BUY).

A Meteoric Rise Cannot Sustain

A maker of customer engagement software, major tech companies like Airbnb (NASDAQ: ABNB), MercadoLibre (NASDAQ: MELI), and Lyft (NASDAQ: LYFT) all took quickly to Twilio's offerings. As a matter of fact, their early adoption helped TWLO quickly jump from $277 million in 2016 to an astonishing $2.84 billion by 2021.

Unfortunately, while the stock had a remarkable rise it has struggled a little of late, despite the fact that sales have been pretty consistent across the past few years. In 2 out of the last 4 quarters, Twilio sales beat the consensus estimate but not the range; and in the other 2 quarters, the stock beat the entire range. This helped the company shore up some vulnerability as earnings slipped back into the red last year, after three straight years of range beats.

Still, earnings for last year did satisfy the estimate so it may not be as bad as it could have been. This matters because earnings, on a quarterly basis, only failed to meet the estimate once (Q2) while beating the range—in a pretty big way—in both Q1 and Q3 of 2022.

Not Out of the Woods...But...

Twilio's bottom line is more of the same dichotomy. While they did post a net profit of $2 million last year, it only cushioned a bigger non-GAAP net loss of $49 million. More importantly, they posted a net EPS loss of -$0.27 per share despite besting the consensus estimate. This trouble worsens when observing their GAAP basis, which more than doubled net losses from $224 million to $482 million.

Currently, TWLO quarterly earnings are also down, now to -$0.10 on sales of $1.0B. This means the company has quite a long way to go if they want to reach the $109.54 price target by their next reporting date, which is Feb 8, 2023. For reference, the current price is more than half of this, at $45.68. Then again, a HOLD rating suggests this kind of momentum is not impossible.

More importantly, though, Twilio is not growing at the rate and strength they had hoped for and this has generated some uncertainty about their long-term health. As a matter of fact, this highlighted risk has dragged the stock, which has fallen more than 90% since reaching an all-time high of $364.00 in February of last year.

Don't Count Them Out Yet

Even after the stock plummeted as far as it has, analysts still think its current share value is a bargain. Even if Twilio can only manage a meager 10 or 15% revenue increase next year, some investors believe this value stock could be worth it. For this reason, analysts have given TWLO a HOLD rating.

The fact that TWLO's stock could be so actionable from its big decline is promising. And this becomes clear when we observe the wide range of progress among competing stocks.

Take Splunk (NASDAQ: SPLK) for example. They currently have a Moderate BUY rating with an upside of 73.14%, which is nearly half that of TWLO (+127.7%). Furthermore, SPLK is currently seeing more than -396% Return on Equity and -14.03% Return on Assets. While TWLO is also negative in these areas, their numbers are far more reasonable (at -$8.13% and -6.87%, respectively).

The two stocks have about the same beta value (1.45, on average) and similar projected earnings growth margins (around $0.10) on the year. Also, their Price-to-Sales ratio (P/S) and price-to-earnings ratio (P/S) are both relatively close. With this in mind, their difference in rating could simply be a matter of opinion or preference; or that their respective industry niches have different expectations.

Another TWLO competitor is Citrix Systems (NASDAQ: CTXS). On paper, CTXS appears significantly stronger than TWLO. For one, none of their numbers are in the red. More importantly, their current value is in the top 20% of the stock's 52-week range, meaning it is holding strong, especially compared to SPLK and TWLO, which are below 7% and 1% of their respective 52-week ranges.

Because of their healthy status and stability—it is 92% less volatile than the S&P—it is no wonder that CTXS gets a higher rating than TWLO. However, a -17.2% downside with weak dividend strength has given them a REDUCE rating, which is only slightly better than TWLO's HOLD rating, in some regards.

And that makes Twilio one to watch over the next quarter: buy now, while the value is good or hold until it starts to climb again.