Twilio Inc. (TWLO) provides cloud communications and customer engagement platforms that enable developers to build, scale, and operate customer engagement within software applications in the United States and internationally.

Shares of TWLO have plunged 83.7% in price year-to-date and 86.4% over the past year to close the last trading session at $42.74. The stock is currently trading 86.5% below its 52-week high of $317, which it hit on November 8, 2021.

Cathie Wood, co-founder and CEO of Ark Invest, recently bought shares of TWLO to take advantage of its price dip. This month, Wood loaded up more than 722,630 shares of TWLO. The stock has approximately 3.61% ARK ownership.

The communication services company reported revenue and gross profit of $983.03 million and $462.08 million for the fiscal 2022 third quarter, up 32.8% and 26.7% year-over-year, respectively. However, its bottom line declined significantly. Its non-GAAP net loss and net loss per share attributable to common shareholders came in at $49 million and $0.27, compared to non-GAAP net income and income per share of $1.75 million and $0.01 in the year-ago quarter, respectively.

Also, the company is rapidly burning cash. As of September 30, 2022, TWLO’s cash and cash equivalents amounted to $632.79 million, versus $1.48 billion as of December 31, 2022.

Bank of America Corp (BAC) analyst Michael J. Funk recently downgraded TWLO to Underperform from Buy and lowered its price target to $85 from $175, citing concerns about its revenue growth prospects amid increased competition.

BofA said, “there is downside risk to FY23 consensus revenue, which has not kept pace with the deteriorating economic environment. FY23 consensus revenue has fallen just -1.8% over the last six months, which does not fully reflect macroeconomic risks to TLWO’s usage-based model, in our view. We have lowered our FY23 revenue forecast from $4,930mn to $4,743mn, which is now 3% below consensus.”

Here is what I think could influence TWLO’s performance in the upcoming months:

Recent Negative Developments

In September, TWLO laid off 11% of its workforce as part of a restructuring program. Jeff Lawson, the company’s CEO, said in a letter to the staff that its headcount had grown too fast as it attempted to meet its profitability goals and pursued projects that didn’t fall within the company’s priorities.

Also, on August 8, TWLO disclosed that some of its employee and customer accounts were hacked as part of a scheme in which outsiders duped employees into handing over their passwords. Such security breaches may result in a significant loss of customer confidence and have a material impact on the company’s finances.

Disappointing Financials

TWLO’s operating expenses increased 54% year-over-year to $919.07 million in the fiscal 2022 third quarter ended September 30, 2022. The company’s non-GAAP operating loss was $35.10 million, compared to a non-GAAP operating income of $8.20 million in the prior-year period.

Furthermore, the company’s non-GAAP net loss and loss per share attributable to common shareholders came in at $49 million and $0.27, compared to non-GAAP net income and income per share of $1.75 million and $0.01, respectively.

Weak Growth Prospects

Analysts expect revenues to increase 18.7% year-over-year to $999.91 million in the fiscal 2022 fourth quarter (ending December 31, 2022). However, the company’s loss per share for the ongoing quarter is expected to come to $0.09. The company has missed the consensus EPS estimates in each of the trailing four quarters, which is disappointing.

In addition, the company's loss per share estimate of $0.47 for the current fiscal year indicates a worsening of 88.3% year-over-year.

Low Profitability

In terms of the trailing-12-month gross profit margin, TWLO’s 47.96% is 4.5% lower than the 50.22% industry average. And its trailing-12-month EBITDA margin of negative 22.61% compares to the 12.12% industry average. Likewise, the stock’s trailing-12-month net income margin of negative 36.17% compares to the industry average of negative 3.87%.

Furthermore, TWLO’s trailing-12-month ROCE, ROTC, and ROTA of negative 12.20%, 5.43%, and 10.45% compare to industry averages of 6.51%, 3.72%, and 2.16%, respectively. The stock’s trailing-12-month asset turnover ratio of 0.28% is 55% lower than the 0.63% industry average.

POWR Ratings Reflect Bleak Prospects

TWLO has an overall rating of D, translating to a Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TWLO has a grade of D for Stability. The stock’s relatively high beta of 1.77 justifies the Stability grade. In addition, it has a D grade for Quality, consistent with its lower-than-industry profitability metrics.

TWLO is ranked #23 out of 26 stocks in the F-rated Software-SAAS industry

Beyond what I have stated above, we have also given TWLO grades for Sentiment, Growth, Value, and Momentum. Get all TWLO ratings here.

Bottom Line

TWLO’s top-line growth didn’t translate into bottom-line improvement in its last reported quarter. Moreover, the company estimated its fourth-quarter non-GAAP loss from operations to come between $15 million and $5 million. Also, its non-GAAP loss per share is expected to come between $0.11 and $0.06. The stock is currently trading below its 50-day and 200-day moving averages of $71.07 and $110.83, indicating a downtrend.

Given TWLO’s deteriorating financials, bleak growth prospects, and lower-than-industry profitability, we think it could be wise to avoid this Cathie Wood holding now.

How Does Twilio Inc. (TWLO) Stack Up Against Its Peers?

TWLO has an overall POWR Rating of D. One could also check out these other stocks within the Software-SAAS industry: Park City Group, Inc. (PCYG) with an A (Strong Buy) rating and Informatica Inc. (INFA) with a B (Buy) rating.

TWLO shares rose $0.32 (+0.75%) in premarket trading Monday. Year-to-date, TWLO has declined -83.77%, versus a -19.84% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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