Though shares of Twilio (TWLO +2.30%) have underperformed the broader market so far in 2024 with gains of 19%, compared to the 23.6% gains clocked by the S&P 500 index, a closer look at the recent stock price action will tell us that investors have become incredibly bullish about the company of late.
More specifically, Twilio stock has gone parabolic since releasing its third-quarter results on Oct. 30, jumping 28% in the past week thanks to a better-than-expected set of numbers and improved guidance for the year. A parabolic move refers to a rapid increase in a company's stock price in a short period of time (similar to the right side of a parabolic curve). The good part is that Twilio may be able to sustain its newly found momentum thanks to artificial intelligence (AI).
NYSE: TWLO
Key Data Points
Let's look at how AI is playing a central role in helping Twilio ramp up its growth and could unlock a solid long-term growth opportunity for the company.
Twilio's AI-focused efforts are positively impacting customer growth and spending
Twilio's Q3 revenue increased 10% year over year to $1.13 billion, ahead of the $1.09 billion consensus estimate. The company also reported a terrific year-over-year jump of 76% in its bottom line to $1.02 per share, comprehensively beating the consensus estimate of $0.86 per share. Twilio's guidance turned out to be the icing on the cake as it is now expecting to finish 2024 with organic revenue growth of 7.5% to 8% compared to the earlier expectation of 6% to 7% growth.
Even better, Twilio management raised its adjusted operating income guidance to a range of $700 million to $710 million from the previous $650 million to $675 million. It also expects to generate between $650 million and $675 million in free cash flow this year.
Twilio's focus on keeping its costs in check and the growing traction of its new features that utilize AI to help its clients gain more business from their customers are the reasons behind its accelerating top-line growth and the terrific increase in its earnings. Twilio offers a cloud-based communications platform through which its clients can reach their customers through different channels, such as text, voice, chat, video, email, and more.
The company has been integrating AI into its cloud platform since last year so that it can enable its clients to reach their customers in a more efficient manner and help them win a bigger share of their wallets. The good part is that its strategy seems to be paying off now. On its latest earnings conference call, Twilio CEO Khozema Shipchandler remarked:
More customers are turning to Twilio because we deliver a stronger ROI, driving demonstrable results that help customers increase their revenue and reduce their costs. By integrating AI with our core product suite, we're able to automate capabilities, boost productivity, and drive personalization at scale.
Shipchandler also said Twilio is placing a "concerted focus on embedding AI and machine learning throughout the Twilio platform" and laid out several examples of its customers benefiting from the increased adoption of its AI-focused offerings. It is unsurprising to see Twilio's AI-focused offerings gaining momentum as the size of the communications platform-as-a-service (CPaaS) market Twilio serves is expected to grow from $12 billion this year to $121 billion in 2034, according to Future Market Insights.
The research firm points out that the deployment of AI tools in the CPaaS space will play a central role in driving this market's terrific growth over the next decade. This probably explains why Twilio is now witnessing a bump in its customer base. It ended Q3 with 320,000 active customer accounts, compared to 306,000 in the same quarter last year.
More importantly, the company reported a dollar-based net expansion rate of 105% last quarter. A reading of more than 100% in this metric means Twilio's customers have either increased their usage of the company's solutions or are buying additional solutions from the company. The metric compares Twilio's customers' spending in a particular quarter to the spending by those same customers in the same quarter the previous year.
What's worth noting here is that Twilio's dollar-based net expansion rate improved from 101% in the same quarter last year. So, Twilio could be at the beginning of a healthy growth curve because of AI, which is why analysts have also raised their growth expectations.
TWLO Revenue Estimates for Current Fiscal Year data by YCharts.
Outstanding earnings growth and valuation make this stock a no-brainer buy
Analysts expect Twilio to finish 2024 with $3.67 in earnings per share (EPS), an increase of nearly 50% from last year.
TWLO EPS Estimates for Current Fiscal Year data by YCharts. EPS = earnings per share.
As the chart above shows, earnings estimates for the next two years have been increased of late, with analysts expecting Twilio to clock double-digit bottom-line growth in 2025 and 2026. Additionally, the company is forecast to clock 20% annual earnings growth for the next five years. However, don't be surprised to see a stronger performance thanks to increased customer spending on its AI solutions.
All this makes Twilio a top AI stock to buy right now, considering it is trading at just 22 times forward earnings, a big discount to the U.S. technology sector's average earnings multiple of 49. If the market decides to reward Twilio with a higher earnings multiple in the future thanks to its AI-powered growth, it could deliver outstanding gains to investors in the long run, given the pace at which its bottom line is likely to grow.
So, there is a good chance that Twilio's red-hot stock market run is here to stay, which is why investors should consider buying it before it flies higher.
