Twilio Q2 Earnings: Still Potential Upside And Undervalued (NYSE:TWLO)

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The market has been highly unpredictable around earnings season, with Twilio (NYSE: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.

Earnings surprise chart

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.

Net-dollar expansion slide

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.

Revenue growth is definitely decelerating, but the market should be very impressive with organic growth reaching nearly 30% while some tech companies are failing to even maintain positive growth.

Crazy Value

While not a big fan of using the trailing P/S ratio, the below chart provides a great highlight of how Twilio has never traded this cheap. The valuation got outrageous during covid as reported revenue growth peaked at 67% due to acquisitions, but the stock is now trading at half the P/S ratio as prior to covid.

TWLO Stock PS Ratio
TWLO PS Ratio data by YCharts

The company is vastly larger now, with annual revenues approaching $4 billion, but the stock first traded at this price back in 2018. A great way to view the valuation here considering all the acquisitions is the revenue per share figure. Back in 2018, a shareholder was only getting $5 per share in sales, while the company now offers upwards of $18 based on the 2022 revenue target.

TWLO Stock Revenue Per Share
TWLO data by YCharts

Takeaway

The key investor takeaway is that Twilio is far better bargain here. Even with covid pull forwards, the cloud communications leader still offers 30% organic growth. The stock offers a great value here with nothing wrong with the business.

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