Twilio: Deep Value Tech Stock With 30% Net Cash And Expanding Margins (NYSE:TWLO)

Twilio (NYSE:TWLO) is no longer a hyper-growth stock. At these valuations though, hyper-growth is no longer needed to justify valuations. TWLO has made impressive progress in driving expanding profit margins even as it faces decelerating top-line growth from a tough macro environment. The company has a sizable net cash position and is repurchasing shares. While it is not clear if we have reached the financial bottom, the stock is offering solid value even without stronger growth rates. Generative AI may even help to bolster the value proposition of their products, though it is too early to say if it is a friend or foe. I reiterate my buy rating for the stock as it remains one of the few deep value opportunities in the tech sector.

TWLO Stock Price

TWLO remains a shell of all-time highs even after bouncing off the lows. Given where growth rates stand today, I am doubtful that TWLO will return to all-time highs any time soon, if ever.

I last covered TWLO in June where I called the stock cheap even after the news of activist involvement spurred a rally. The stock is down 20% since then, reflecting market choppiness amidst interest rate fears.

TWLO Stock Key Metrics

In its most recent quarter, TWLO delivered 10% YoY revenue growth to $1.038 billion, comfortably ahead of guidance for $990 million.

The company saw its dollar-based net expansion rate compress yet again to 103% – this stood at 135% at the height of the pandemic. The rising interest rate environment has pushed customers to rationalize their spending habits with a greater focus on cost control. In theory this cloud optimization should end at some point, but the timing of that transition is hard to predict.

TWLO delivered $120 million in non-GAAP income, representing a 12% margin and well ahead guidance for $75 million.

TWLO divested its IoT business and ValueFirst business in June and July, respectively. It appears that the IoT business was sold off with a priority to improve profitability, as the company received 10 million shares of KORE (KORE) common stock (KORE is a former SPAC that trades as a penny stock). These two businesses previously contributed just over $100 million in annualized revenue.

TWLO ended the quarter with $3.6 billion of cash and short term investments and $656 million of equity investments versus $988 million in debt. The company repurchased $500 million of stock year to date and has $500 million remaining in its share repurchase program, which expires at the end of 2024.

Looking ahead, management is guiding for up to $990 million in revenue in the third quarter, implying 1% YoY growth (or 4% excluding the IoT and ValueFirst divestitures). Consensus estimates have TWLO falling just short of this guidance at $988.65 million in revenue, with non-GAAP EPS expected to come at the high end of the $0.33 to $0.37 range. I expect TWLO to outperform on both the top and bottom line given that management has already had several quarters to re-calibrate their abilities to forecast.

Management expects to generate up to $400 million in non-GAAP income for the full year, up from prior guidance of $350 million.

On the conference call, management noted that “competitive churn has remained low and stable” but they are seeing “greater price sensitivity with some of our SMB customers.” The company has sought to address that issue through initiatives to enable small and mid-sized businesses to start quickly with smaller deployments, with the aim of driving longer term growth. Management noted that the tough macro environment has led to customers taking more of a “learning mode” with some resistance to “deploying things actively.” Regarding the evaporation in revenue growth, management stated that it was simply a byproduct of the poor bookings growth in past quarters but should inflect upwards as bookings improve as early as later this year.

Is TWLO Stock A Buy, Sell, or Hold?

Heading into the pandemic, TWLO was a tech stock darling, as its usage-based model allowed it to show rapid growth alongside a booming economy. TWLO is a customer engagement functionality provider, enabling its customers to add communication capabilities into their applications.

That optimism has long disappeared after TWLO began showing rapidly decelerating growth rates following accelerated growth during the pandemic. The stock recently traded hands at just over 2x sales.

Due to expected operating leverage, TWLO is expected to drive much faster earnings growth, with the stock trading at under 12x 2026 estimates.

Management continues to expect a return to their target of 15% to 25% top-line growth. A return to just the bottom end of that range may imply substantial upside. Assuming 20% long term net margins and a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see TWLO trading hands at around 4.5x sales, implying a stock price of around $115 over the next 12 months.

What are the key risks? It is admittedly more comfortable betting on a story incorporating revenue deceleration rather than acceleration. It is possible that TWLO is unable to revive top-line growth rates even upon a macro recovery. In such a case, the company’s continued commitment to driving profitability and substantial net cash balance sheet may offer some downside protection, but I’d still expect shares to trend lower to reflect reduced optimism for forward growth. It is possible that TWLO is operating in a commoditized market and this price competition is the real reason behind the struggling growth rates. It is possible that generative AI ends up working against the company, perhaps helping its competitors to create more equal products.

The low valuation of the stock creates an attractive setup with low forward expectations. The net cash balance sheet and non-GAAP profitability add more time for this thesis to play out. I reiterate my buy rating as TWLO is one of the few deep value plays still remaining after a violent recovery in the sector.