Twilio Stock: Third Quarter Headwinds: Company Promises FY2023 Profitability

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Although Twilio Inc (New York Stock Exchange:TWLO) continues to report solid growth and led to an excellent 30% organic growth in FQ3’22, it is evident that Mr. Market is less convinced, as seen through the destruction of its share prices thus far. However, we consider that this alone creates a very attractive entry point for investors who have been patient since the hyper-pandemic valuations, as the management intended to be profitable by fiscal 2023, regardless of the impact on future growth.

Indeed, that is an ambitious statement, given the worsening macroeconomy. Naturally, we assume that TWLO refers to non-GAAP profitability, as the company still reports Massive Stock-Based Compensation of $748.33 million in the last twelve months, compared to its GAAP net income of -$1.05 billion. However, the updated data shows that the company actually has the lion’s share. 53.58% of the global CPaaS market in fiscal year 2021, instead of our previous data of 38%. Combined with the company’s forecast of a growth rate of up to 30% in the future, we believe that TWLO will continue to aggressively increase its relevance in the future, as the world competes in the digital transformation market.

Investors should obviously also size their portfolio accordingly if they choose to add to these levels, should further pullbacks occur. Big Tech’s recent flurry of earnings this week had analysts expecting a quick turnaround, though we’re less hopeful for now as September’s PPI/CPI remains surprisingly inflated and the US labor market remains strong. Thus, indicating the hard work of the feds ahead until 2023, as 89.3% of analysts expect a 75 basis point hike at the next Fed meeting in November and probably December.

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In the meantime, as we head into TWLO’s FQ3’22 earnings call on November 3, conservative investors may want to wait a bit longer. We don’t expect to see massive short-term volatility as the stock has been hit too badly back to its previous July 2018 levels. Only catastrophic news would further test its current support level and potentially sink the stock to $60 again. . Although we believe that such levels would also provide bottom-fishing investors with a greater margin of safety for investment and long-term growth in these uncertain conditions.

TWLO needs to prove itself through the impending recession

TWLO Revenue, Net Income (in billions of dollars), %, EBIT % and EPS

S&P Equity CI

For its upcoming FQ3’22 earnings call, TWLO is expected to report revenue of $973.8M and EBIT margins of -5.8%, indicating an increase of 3.22% though a decrease of -5 percentage points QoQ, respectively. Otherwise, an excellent YoY growth of 31.55% although a moderation of -6.9 percentage points YoY, respectively.

Rising cost inflation and elevated operating expenses have definitely affected TWLO’s margins and profitability for the coming quarter. The company is expected to report net income of -$65M and net income margins of -6.7%, representing a decrease of 336.78% and -4 percentage points QoQ, respectively. Otherwise, a new year-on-year drop of -97.23% and -6.9 percentage points year-on-year, respectively. However, these are temporary headwinds, as TWLO has embarked on aggressive job cuts through Q4 2022 with the remote work strategy, further boosting its operational efficiency despite hefty $90 million one-time charges.

TWLO Cash/ Equivalents and FCF (in billions of $) % and Net Debt

S&P Equity CI

Therefore, it also temporarily affects TWLO’s Free Cash Flow (FCF) generation in FQ3’22 to -$45.6M and FCF margins of -4.7%. However, we are encouraged by these numbers as they represent notable QoQ and YoY improvements. Additionally, analysts also expect the company to report an improved net debt position of -$1.19bn for the coming quarter, compared to -$3.38bn in FQ2’22 and -$4.38bn in FQ3’21. As a result, we may see some decent liquidity as TWLO carefully navigates through its first downturn since joining in 2008.

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TWLO Projected Revenue, Net Income (in billions of dollars), %, EBIT % and EPS

S&P Equity CI

Over the next three years, TWLO is expected to post revenue growth at a CAGR of 29.8%. While it represents a notable slowdown in gross revenue expansion from pre-pandemic levels of 59.9% and pandemic levels of 50.4%, we are encouraged by its projected net profitability from FY2023 onward. Impressive, despite the aggressive Fed hikes ahead and, consequently, the worsening of the macroeconomy.

It is also important to note that consensus estimates remain quietly confident in TWLO’s early run as there are minimal downgrades of -2.2% in its headline growth, and bottom line results remain intact for now. Furthermore, we expect the figures for fiscal years 2021 and 2022 to be exceptions to its previous performance, as the company may report improved EPS numbers of $0.2 in fiscal year 2023 and $0.8 in fiscal year 2024. Naturally, potentially triggering its stock rally for H2’23 as Fed pivot.

TWLO Projected FCF ($ Billions) % & Net Debt

S&P Equity CI

Therefore, it also boosts TWLO’s FCF generation, and analysts expect liquidity improvements on the balance sheet going forward, as its net debts continue to moderate through fiscal 2024. Of course, this assumes an acquisition strategy similar to the one the company has undertaken so far, with minimal reliance on capital increases and share dilution. However, as recession fears have also reduced the availability of equity funds in the market, we expect TWLO’s expansion to potentially lean more towards the latter. Investors take note.

In the meantime, we encourage you to read our previous article on TWLO, which will help you better understand its market position and opportunities.

  • Twilio is revving up with frenzied land grabbing strategies
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So is TWLO stock a buy?sell or hold?

TWLO 5Y EV/Revenue and P/E Valuations

TWLO 5Y EV/Revenue and P/E Valuations

S&P Equity CI

TWLO is currently trading at an EV/NTM Revenue of 2.41x and NTM P/E of -169.90x, lower than its 5Y average EV/Revenue of 12.59x, though vastly improved over its 5Y average P/E of -442.06x. The stock is also trading at $74.28, down -79.58% from its 52-week high of $363.80, albeit at a 19.61% premium from its 52-week low of $62.10. However, consensus estimates remain bullish on TWLO’s prospects, given its $129.10 price target and a 73.80% rise from current prices.

TWLO 3Y Stock Price

TWLO 5Y Stock Price

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It is evident that TWLO has continued to underperform thus far, trading sideways after the continuous slide since July 2021. With FUD highs in the market, we can assume that Mr. Market is likely punishing speculative tech stocks. with minimal profitability to speak of. of, in addition to their previously inflated valuations.

It is a fact that TWLO’s stock would be drastically corrected as it used to boast EV/Revenue max valuations of 30.65x and P/E of 19,448.25x or -209,825.00x. Even then, the stock still trades at a slight premium compared to other software companies, such as Salesforce (CRM) at NTM P/E of 30.61x and Oracle (ORCL) at 14.61x, made significantly worse by its low future profitability.

However, assuming this forms a sustainable bottom for TWLO, we can safely assume that most of the pessimism is already entrenched, with minimal to moderate downside to current levels. Therefore, we continue to rate the stock as Buy, preferably in the mid-$60s.

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