Over the past few years, Twilio (TWLO -0.50%) has faced some challenges in maintaining its market position and revenue growth. However, with the help of AI-powered solutions, the company may be on track for a successful recovery.
Many investors are today considering Twilio's potential for growth thanks to its adoption of AI technology. Let's explore the factors behind its downturn starting in late 2021, how AI can help its resurgence over the next several years, and why the stock may be a wise investment choice for long-term gains.
What Twilio does
Mobile apps have become an essential part of our lives, and we use them for everything from communication to entertainment to shopping. In 2022, Statista estimated that people downloaded over 255 billion mobile apps worldwide, and experts expect this number to continue to grow in the years to come.
Many of these apps require some communication function, which is where Twilio comes in. It is a platform that helps software developers add communication features to their apps. With its tools, developers can build apps to make and receive phone calls, send and receive text messages, and even build chat and video applications. It's like a toolbox developers can use to add communication capabilities to their apps without building everything from scratch.
Businesses use Twilio to improve customer interactions, streamline operations, innovate, expand, and save costs. You may have used an app powered by Twilio without even knowing it. Companies like Toyota, Lyft, Airbnb, Glassdoor, Yelp, the American Red Cross, and many more well-known organizations use Twilio's services.
The stock has dropped off a cliff since late 2021
Twilio's stock has dropped since 2021 due to several factors, including:
- Rising interest rates: Rising interest rates make it more expensive for companies to borrow money, leading to lower customer investment and spending -- hurting Twilio's business, as it relies on companies to buy its services.
- The war in Ukraine: The war in Ukraine has caused economic uncertainty, which has led to investors selling stocks. The fight does not directly affect it, but the tension has made investors less willing to take risks.
- Competition: The company faces competition from other cloud communications platforms, such as Microsoft's Azure. Many competitors are investing heavily in their cloud communications offerings, which could make it more difficult for Twilio to grow.
- Twilio's unprofitability: The company's revenue has increased significantly over the years but has yet to grow profitably, leading some investors to question whether Twilio can sustain its growth without becoming profitable.
As a result of these factors and a rapid fall in revenue growth, the stock has been in a free fall since 2021, as seen in the chart.
Twilio is an excellent company with a lot of potential. However, the market is currently not rewarding growth at any cost. Investors are looking for companies that can grow profitably. The stock price will likely recover if it can reaccelerate revenue growth and show substantial progress on becoming profitable. However, until then, the stock price is likely to remain moribund.
Twilio introduces CustomerAI
When OpenAI released ChatGPT in late 2022, it started a gold rush of companies adopting generative AI (also called large language models) into their products and services.
However, you might have asked yourself, "What will differentiate one company's AI product from its competitors?" One differentiating factor is that the data quality used to train a generative AI model will affect the generated content's accuracy, reliability, and diversity.
Twilio's significant advantage in incorporating AI into its products is that it might have the highest-quality first-party data on customer interactions within its customer data platform (CDP) named Segment. According to market researcher IDC, Twilio ranked No. 1 CDP in worldwide market share in 2022 for the fourth consecutive year.
A CDP collects, combines, and activates customer data from various sources. This data can include customer interactions, purchase history, social media data, and website behavior.
The company unveiled a new AI product called CustomerAI at its SIGNAL developer conference in late August 2023. The product combines predictive and generative AI with customer data flowing through its CDP to help businesses better serve their customers.
CEO Jeff Lawson believes Segment's data gives CustomerAI a considerable edge over competing offerings. During the second-quarter 2023 earnings call, he said: "By training large language models for customers with their data that lives inside Segment, Twilio will help customers enter the AI race multiple steps ahead of their peers. Twilio's ability to drive that level of differentiated customer value proposition has the potential to be a significant tailwind for our business."
If Segment's data can train AI models to produce more accurate and relevant answers or predictions than competing AI products, CustomerAI could be a game changer for Twilio and go a long way toward helping it reaccelerate revenue growth.
Should you buy the stock?
Twilio's recent restructuring efforts are improving profitability, evidenced by an expanding generally accepted accounting principles (GAAP) operating margin and reduced operating loss. The company also upped its full fiscal year non-GAAP income from operations from $350 million to $400 million.
The numbers show that this company's price-to-sales (P/S) ratio is currently at 2.97, much lower than its P/S median ratio of 11.63 over the past decade. But what does that mean for investors?
It's a sign that the market may undervalue this stock, and it has some serious growth potential. With the economy improving and the company's AI prospects looking bright, we could see a boost in revenue growth. Plus, it's on track to become profitable. This stock should be on the radar for those looking for growth opportunities.
