Twilio: 4 compelling reasons to buy the dip

Key Points

• Twilio is a leading communications-as-a-platform (CPaaS) provider offering a wide range of easy-to-integrate communications APIs for businesses.
• Twilio shares fell more than 13% in reaction to its Q4 2023 earnings report, which beat EPS estimates by 29 cents on 5% YoY revenue growth but lowered Q1 2024 revenue guidance.
• Twilio may divest some of its businesses or even be a takeover target as its valuation gets more reasonable.

Twilio Inc. NYSE: TWLO is a leading cloud-based communications platform-as-a-service (CPaaS) provider. This business services sector company was named a leader in the 2023 Gartner Magic Quadrant for CPaaS. Twilio offers a wide range of communications services to businesses, ranging from voice, messaging, user authentication, email, video, and artificial intelligence (AI). The company enables businesses to integrate a wide range of channels and services to better communicate with customers. They were one of the first movers in the CPaaS space.

Twilio offers a scalable infrastructure and a pay-as-you-go model, adding flexibility to adapt to the needs of its clients. Twilio is known for its developer-focused and easy-to-integrate APIs backed by a strong ecosystem of partners. Its shares plummeted more than 13% on its Q4 2023 earnings report. Here are four compelling reasons to use this sell-off as an opportunity to take a look at the stock.

1. Twilio is gaining traction on its path to profitability.

While the rate of growth for Twilio has slowed down from the 48% YoY growth trajectories in Q1 2023 to 5% YoY in its latest quarter, the company is moving closer toward GAAP profitability. The company has beat consensus EPS estimates for the past five years, and Q4 2023 was no exception. The focus on growth has been replaced by a focus on its path to profitability.

The company lost “only" $50 million in operating losses (excluding restructuring and impairment charges) in the quarter compared to over $210 million in the year-ago period. Its non-GAAP operating income rose to $172.6 million, up from $32.9 million in the year-ago period. Active customer accounts flattened just over 350,000 as the company started to lose net accounts. However, Twilio added 5% more customers in 2023 overall. Remember that Twilio historically tends to provide modest guidance to surprise on the upside with sizeable beats. A case in point is that Twilio crushed Q4 2023 consensus estimates by 29 cents, reporting 86 cents per share versus 57 cents. The company also has $4 billion in its cash war chest. 

2. Artificial Intelligence (AI) features are gaining traction with customers.

It's no surprise that AI is at the forefront of businesses. While the uncertain macroeconomic climate has caused businesses to pull back on communications spending, they continue spending on AI to remain competitive and even relevant. Twilio launched its CustomerAI in Q3 2023, providing predictive and data-driven customer predictions. The company is bullish on AI as over 150 customers have already added the service.

For Twilio, its communications business brings in more than 80% of its revenues. The company consolidated its business into just two divisions: Communications and Segment. The segment contains its Data and Applications business, which continued to underperform in the quarter, prompting an operational review, which it will provide an update for in March. 

3. Twilio got a 9-figure commitment from a leading cloud communications company.  

The company inked its largest messaging deal in company history with a leading cloud communications company. The deal is a nine-figure commitment. This is a sign of stabilization in the CPaaS industry as companies open up their wallets again.

4. Twilio is a potential acquisition target.

As Twilio shares sink, there is more conjecture about divesting some businesses. There have been rumors swirling around that Dutch messaging startup Bird, formerly known as MessageBird, is in talks with outside investors to make a bid to acquire Twilio. Bird has a market cap that is about a third of Twilio's. However, Twilio has been under pressure by activist investor Anson Funds to consider selling parts or all of its business.

JMP Securities analyst Patrick Walravens chimed in, "From a strategic point of view, we see several possible acquirers for Segment including Amazon Inc. NASDAQ: AMZN,  Salesforce Inc. NYSE: CRM, Adobe Inc. NASDAQ: ADBE, Snowflake Inc. NYSE: SNOW and private equity. On the flip side, Twilio itself might make an attractive acquisition target as suggested by reports of privately held company MessageBird in talks to raise money for a 'longshot' bid."

Twilio analyst ratings and price targets are at MarketBeat. Twilio peers and competitor stocks can be found with the MarketBeat stock screener.

Daily descending triangle breakdown  

The daily candlestick chart on TWLO illustrates a descending triangle breakdown pattern. The descending trendline formed at $76.03 on January 22, 2024. It capped all the bounce attempts at lower highs against the flat-bottom lower trendline at $68.85. TWLO attempted to break through the descending trendline on the day of the earnings release, but the lowered guidance caused shares to gap down to $64.89 and collapse on the following days. The daily relative strength index (RSI) fell below the oversold 30-band. Pullback support levels are at $55.32, $53.63, $52.45 and $51.46.