Twilio NYSE:TWLO Stock Report

Twilio: Nothing Is Wrong

Twilio reported another strong quarter as the cloud communications firm continues to ring up $20 million beats. The market didn't like guidance for up to 30% organic revenue growth. The stock is too cheap here, trading below 5x sales and half the pre-covid multiple despite still generating fast growth. The market has been highly unpredictable around earnings season, with Twilio (TWLO) being a prime example. The stock market has been very forgiving of some weak results while smashing a tech company with 30% growth. My investment thesis is ultra-Bullish on the cloud communications stock, trading at multi-year lows following a 13.5% dip on Friday. Don't Fret Guidance Despite reporting a quarter where Twilio smashed analyst targets again, the stock was squashed for providing some tepid guidance for Q3. The market needs to better understand the conservative nature of the management team before overreacting to guidance. Twilio reported Q2'22 revenues smashed analyst targets by $22 million to reach $943 million. The cloud communications firm grew revenue by a very impressive 41% with organic growth hitting 33%. The company has a long history of blowing away revenue targets each quarter. The below chart highlights the constant quarterly revenue surprise as a percentage. The quarterly revenue beat tends to top $20 million on a regular basis. Source: Seeking Alpha Due to this trend, investor shouldn't fret the guidance for Q3 revenues at the $970 million level at the midpoint. Twilio is likely to hit $990+ million for the quarter and approach $1 billion in Q3 revenues, way ahead of the analyst estimates heading into the Q2'22 report of $979 million. The market freaked out some due to the much larger targeted loss from operations of at least $60 million, but a large amount of this loss is due to the odd $35 million cost of a non-cash charge for the adoption of a new sabbatical program. Such non-cash charges shouldn't be included in non-GAAP numbers. Take out this odd charge, and Twilio gets back close to the original analyst EPS target for the quarter of a loss of $0.11. In fact, the low end of guidance suggests just a $0.14 loss for the quarter, once excluding the $35 million charge from a $60 million loss. Once factoring in the normal beat, Twilio again beats this target and likely cuts the loss level from the Q2'22 amount in a scenario where the stock would normally have rallied following the earnings report. The company remains clear that the business is fundamentally strong. Twilio continues to sign bigger deals and provides a platform to seamlessly connect customers across multiple channels, such as this example for a retailer discussed on the Q2'22 earnings call: In fact, Twilio signed its largest Flex deal ever in the second quarter - an eight figure deal with a Fortune 100 retailer to completely reimagine their customer experience with Twilio Flex! This multinational organization expanded its existing relationship with Twilio to rebuild the connection between its brick and mortar and virtual store with Twilio Flex, video, chat and messaging. This data driven, cross-channel customer engagement platform will create a single view of the customer across the organization to provide a seamless, personalized and memorable customer experience across marketing, sales and customer support. Unlike most tech companies that saw covid pull forwards, Twilio is still growing active customer accounts and net dollar expansion. Customer accounts reached 275,000 in the quarter for 15% growth and dollar-based net expansion rates grew 123% in the quarter. Source: Twilio Q2'22 presentation While these numbers spiked during covid lockdowns, Twilio didn't see the excessive acceleration, with the net expansion rate only peaking at 139% back in Q4'20. Some platforms provide general customer engagement that saw a spike during Covid, while Twilio provides a platform where customers start with one product and eventually expand to new products for deeper customer engagement.