Twilio's (TWLO +2.15%) stock caught on fire during the buying frenzy in growth stocks two years ago. The cloud-based communication software provider's shares closed at a record high of $443.49 on Feb. 18, 2021, marking a whopping 2,857% gain from its IPO price of $15 in 2016. But today, Twilio's stock only trades at about $60.
Therefore, a $1,000 investment in Twilio's IPO would have briefly blossomed to nearly $30,000 before withering to about $4,000 today. Many investors likely regret not selling their shares at the top, but a four-bagger gain in seven years isn't too shabby. Let's review the bear and bull cases to see if Twilio's stock is still worth buying after those gut-wrenching declines.
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What the bears will tell you about Twilio
Between 2016 and 2022, Twilio's annual revenue grew at a compound annual growth rate (CAGR) of 55%. That growth was driven by robust demand for its cloud-based communication services, which enabled developers to easily integrate voice calls, text messages, and other features into their apps with just a few lines of code. If you've ever used Lyft's app to contact a driver or Airbnb's app to contact a property's host, then you've accessed Twilio's behind-the-scenes services before. It's easier for developers to outsource those features to Twilio's platform instead of building them from scratch.
NYSE: TWLO
Key Data Points
But over the past few years, Twilio's organic growth cooled off and drove it to make more acquisitions. Back in 2020, Twilio told investors that it could grow its organic revenues by at least 30% annually through 2024. But it withdrew that guidance last November, and analysts now anticipate a much slower CAGR of 13% for its revenues from 2022 to 2025.
Twilio's growth is cooling off as the mobile app market matures, and more competitors -- including the Dutch start-up MessageBird, Plivo, Bandwidth (BAND +3.70%), and Ericsson's (ERIC +1.44%) Vonage -- all creep into its backyard. The macro headwinds are also curbing its growth by throttling the development of new apps and reducing the overall usage (and usage-based fees) of its cloud-based communication services. As Twilio's pricing power wanes, new carrier fees -- which telecom companies now charge third-party apps for accessing their networks -- are compressing its margins.
All of those problems caused Twilio's adjusted gross margin to decline from 57% in 2016 to 51% in 2022. It also hasn't come anywhere close to breaking even on a generally accepted accounting principles (GAAP) basis since its public debut, mainly due to its stock-based compensation (SBC) expenses which still consumed 20% of its revenues last year. But on a non-GAAP basis, which excludes its SBC and other one-time expenses, Twilio also turned unprofitable in 2021 and 2022.
Meanwhile, Twilio's heavy dependence on using SBC to supplement its salaries and acquisitions (including its all-stock $3.2 billion takeover of Segment in 2020) caused its total number of outstanding shares to soar nearly 90% over the past five years. That messy mix of slowing growth, shrinking margins, persistent losses, and ongoing dilution all made Twilio an unappealing investment as rising interest rates rippled through the broader market.
What the bulls will tell you about Twilio
The bulls believe Twilio will maintain its first-mover advantage in its niche market. According to Reportprime, Twilio still controls 24% of the cloud-based communication platform-as-a-service (CPaaS) market, which makes it significantly larger than Nexmo (14%), Plivo (8%), MessageBird (6%), and Sinch (5%). The rest of the market is fragmented among smaller players -- which suggests that Twilio hasn't run out of room to expand via acquisitions.
Twilio's growth should also stabilize as the macro environment improves and the broader CPaaS market expands. According to Market.us, the global CPaaS market could still expand at a CAGR of 28% from 2023 to 2032. Even if Twilio only grows at half that rate with a CAGR of just 14%, its annual revenue could still more than triple to $13 billion by 2032. That's a respectable growth rate for a stock that trades at less than three times this year's sales.
As for its bottom line, analysts expect Twilio to turn profitable again on a non-GAAP basis this year as it trims its workforce and to narrow its GAAP losses through 2025 as it reins in its SBC expenses. Its liquidity also won't run dry anytime soon; it ended its latest quarter with $3.95 billion in cash, cash equivalents, and short-term investments, and its low debt-to-equity ratio of 0.2 still gives it plenty of room to raise fresh cash.
Which argument makes more sense?
Twilio isn't doomed yet, but it will remain in the penalty box until its revenue growth accelerates and it stabilizes its gross margins. So for now, the bearish case against Twilio is still a lot stronger than the bullish one -- so investors should probably stick with other more promising growth stocks for now.
