Like other technology firms, Twilio grew rapidly on expanding COVID-19 demand for its software. However, the stock is now down significantly from its September 2021 peak of $400.
The slide has prompted activist investors to demand the company slash costs or put itself up for sale. Even without major moves, we feel the firm has strong prospects for a rebound and long-term growth.
Meanwhile, the stock trades at 16.8 times the company’s forward earnings forecast, an attractive valuation considering the rising earnings and high R&D spending to maintain and even increase its competitive advantage.
TWILIO INC. (Symbol TWLO on Nasdaq; www.twilio.com) offers a key service to software developers who create mobile apps. Specifically, its own software is used to connect apps to essential functions elsewhere on a device, including dealing with phone calls and messaging.
In the quarter ended June 30, 2024, Twilio’s revenue rose 4.3%, to $1.08 billion from $1.04 billion. The company continues to add to its client base, with a growing emphasis on markets outside of North America; it now has 316,000 active customer accounts (up 3.9% from 304,000 a year ago).
Excluding one-time items, Twilio made $0.87 a share in the latest quarter. That was up 61.1% from $0.54. The big earnings jump came from improved operational efficiencies, as well as reductions in marketing and other costs.
The company holds a huge cash balance of $3.1 billion. Its long-term debt is just $989.8 million.
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Growth Stocks: Activist moves could turn around Twilio’s share price
Twilio has appointed a partner at activist investment firm Sachem Head Capital Management to its board of directors. It made the move in the face of pressure from several activist investment firms looking for significant changes.
Twilio added Andy Stafman and expanded the size of the board by one person for a total of 10 directors.
The change removed the chance of a boardroom challenge from Sachem Head in 2024 when three Twilio directors, including CEO Khozema Shipchandler and board Chairman Jeff Epstein, were scheduled to stand for election.
The company has come under pressure from Sachem as well as other activist investors including Legion Partners and Anson Funds. All have been pushing the company to explore strategic alternatives, including divesting itself of its data and applications business or selling the whole company.
While new CEO Khozema Shipchandler plans to focus on reducing costs instead, mainly through job cuts, a takeover by a larger technology firm remains possible.
Some investors might be concerned that Aidan Viggiano, the company’s chief financial officer recently sold 26,918 shares of the company. He still holds 201,845 shares.
However, we think it’s a mistake to put too much weight on insider trading, since insiders can delude themselves about their company just as easily as outsiders. However, it pays to remember that insiders may sell for a variety of personal reasons that have nothing to do with the company. On the other hand, insiders only make substantial buys for one reason—they think the company has investment appeal. So, insider buying is a more powerful indicator than insider selling.
We think that you need to look at insider selling (and buying) on a case-by-case basis. It’s just one of many factors worth considering.
Twilio’s outlook is positive. All in all, the company’s impressive customer base, leading products and high R&D (over 30% of sales) all bode well for its future success in rapidly growing markets.
Recommendation in Power Growth Investor: Twilio Inc. is a buy.
