Twilio (NYSE: TWLO) It has been a forgettable year for investors so far. The cloud communications specialist’s shares lost 21% of their value in 2024, but the good news is that recent price action suggests a turnaround.
The stock has gained 9% in recent months, and the second quarter 2024 results gave investors cause for celebration. Let’s take a look at what’s been working in Twilio’s favor lately and take a look at the possible reasons why this tech stock could potentially offer even more upside in the long run.
Twilio’s growing customer base could contribute to renewed growth
Twilio reported second-quarter revenue growth of 4% over the year-ago period to $1.08 billion, with organic revenue growth of 7% year-over-year. Revenue exceeded Twilio’s original guidance range of $1.05 billion to $1.06 billion.
The company’s non-GAAP earnings rose to $0.87 per share from $0.54 per share in the year-ago quarter, reflecting a focus on cost cutting. Twilio had originally expected earnings between $0.64 and $0.68 per share. So the significant earnings increase was enough to send Twilio stock up nearly 12% after the company released its results on August 1.
There were some other positive takeaways for investors as well. Twilio reported 316,000 active customer accounts at the end of the last quarter, compared to 304,000 in the same period last year. In addition, the company saw a slight improvement in customer spending, as the net expansion rate on a dollar basis was 102% last quarter.
This metric compares how much Twilio’s customers spent in a given quarter to how much the same customers spent in the same period last year. An improvement in the dollar net expansion rate means the company is getting more money out of its existing customer base. The year-over-year growth in the dollar net expansion rate may not be mind-blowing, but investors should note that the company may be able to drive higher customer spending in the future thanks to the adoption of artificial intelligence (AI) in the customer service space.
Twilio’s cloud communications platform enables companies to reach their customers through multiple channels such as voice, text, video, email, and others. Twilio management pointed out on the recent earnings call that its AI-integrated products are now gaining traction with customers. CEO Khozema Z. Shipchandler emphasized:
During the quarter, we saw success with our newer, higher-margin software products, products that leverage AI like Verify and Voice Intelligence, as well as platform innovations that natively embed AI and machine learning, such as a traffic optimization engine and engagement suite to drive better deliverability and customer engagement.
The company expects these products to drive bigger changes in the long run. This is not surprising, as the use of AI in the customer service market is expected to grow 24% annually through 2033, generating $3.2 billion in revenue by the end of the forecast period. At the same time, the size of the communications platform as a service (CPaaS) that Twilio works with is expected to grow from $15 billion in 2023 to $119 billion in 2031.
All of this suggests that Twilio’s growth could accelerate over time, especially given that the company has built a solid customer base and will benefit from the adoption of new technologies such as AI in its industry.
Healthy earnings growth could help the stock achieve solid gains
Analysts have recently raised their expectations for Twilio’s earnings growth.
TWLO EPS estimates for the current fiscal year, data from YCharts.
The good news is that Twilio is expected to maintain an annual earnings growth rate of nearly 20% over the next five years. Based on earnings of $2.45 per share in 2023, earnings could expand to $6.09 per share in 2028. Twilio currently has a price-to-earnings ratio of 19, which is a discount to the U.S. tech sector’s average earnings multiple of 44.
Assuming the company still trades at this attractive valuation after five years and manages to generate earnings of $6.09 per share, its stock price could rise to $116 per share, a 95% increase from current levels. So there’s a good chance Twilio can sustain its recent run in the long term, and that’s why investors looking to buy a growth stock at a cheap price should buy it before it rises even further.
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Harsh Chauhan does not own any stocks mentioned. The Motley Fool owns Twilio and recommends it. The Motley Fool has a disclosure policy.
