Subdued Growth No Barrier To Twilio Inc. (NYSE:TWLO) With Shares Advancing 27%

Twilio Inc. (NYSE:TWLO) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 86% in the last year.

After such a large jump in price, you could be forgiven for thinking Twilio is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.9x, considering almost half the companies in the United States' IT industry have P/S ratios below 2.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Twilio

How Has Twilio Performed Recently?

Recent times haven't been great for Twilio as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Twilio will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Twilio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Twilio's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.8% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 70% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 8.1% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 12% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Twilio's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The strong share price surge has lead to Twilio's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see Twilio trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

You should always think about risks. Case in point, we've spotted 1 warning sign for Twilio you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.