Twilio (TWLO, Financial) is a market-leading "communications platform as a service" company. They allow software developers to programmatically make/receive phone calls and text messages. In addition, the firm operates a cloud-based contact center, which allows a call center to be operated remotely via the cloud. Twilio's customers include leading brands such as Netflix (NFLX, Financial), Airbnb (ABNB, Financial), Lyft (LYFT, Financial), Deliveroo (LSE:ROO, Financial) and Salesforce (CRM, Financial).
According to Markets & Markets research, the global cloud-based contact center market size is expected to grow at a compound annual growth rate (CAGR) of 25.8% to reach $36.1 billion by 2025, down from $11.5 billion in 2020.
With Twilio's stock having been cut in half from all-time highs, is the stock now undervalued given its growth prospects?
High-growth financials
The firm’s revenue is up a meteoric 61% year-over-year to $2.8 billion as of its most recent earnings results, with a 48% gross profit margin equating to $1.4 billion. However, they are operating at a heavy net loss of $961 million, though the good news is they would only be $173 million short of operating profit without the large R&D investment of $788 million. Wall Street analysts are expecting the top line to continue growing at a decent pace, as shown in the below chart.
Is the stock undervalued?
In order to value Twilio stock, I have plugged in the latest financials into my discounted cash flow model. I have estimated 50% revenue growth for next year and 20% for the next two to five years. In terms of margins, I estimate these to expand optimistically to 23% in the next five years.
Given these assumptions, I get a fair value estimate of $137 per share. The stock is currently trading at $159 and thus is only 15% overvalued. Interestingly enough, on the technical charts, the stock bounced off the $137 price level, which makes me believe my valuation estimate is aligned with the market.
The GF Value chart shows the stock is trading at a very low valuation - so low, in fact, that it highlights a possible “value trap” at the time of writing. The GF Value takes into account historical multiples, past returns and analysts' estimates of future results. Personally, I don’t agree with the value trap assessment, as I wouldn't say the stock is cheap enough to be a value trap.
Guru holdings
Growth stock investor Catherine Wood (Trades, Portfolio) and U.K.-based growth stock firm Ballie Gifford were buying shares of Twilio in the fourth quarter of 2021, during which shares traded for an average price of $297. The stock is down around 46% from the levels they were buying at.
Final thoughts
Overall, I believe Twilio is a fantastic growth stock which is riding the wave of many trends such as cloud communications and call centers. I believe automated text and call services are here to stay and may even be leveraged by brands as social media reach is clogged up. According to my valuation model, the stock is modestly overvalued. High inflation and a suspected rise in interest rates are the main macroeconomic factors which are keeping stocks like this one down right now.
