Twilio (NYSE: TWLO) set the stock market on fire in the first half of 2020 despite getting off to a tentative start on account of terrible bottom-line guidance that left investors panicking in February.
The novel coronavirus pandemic seems to have given the cloud communications specialist's business a shot in the arm as it provides a service that enables organizations to sustain their contact center operations remotely. So, when Twilio delivered its first-quarter report for fiscal 2020, its earnings of $0.06 per share blasted past the Wall Street estimate that called for a loss of $0.11 per share.
That impressive performance and the signs of a substantial uptick in Twilio's business in the wake of the COVID-19 outbreak have led to a hot stock market rally. But has Twilio run too far too soon? Will it be able to deliver enough growth in the coming quarters to sustain its terrific momentum? Let's find out.
Addressing the elephant in the room
Twilio has sent investors' expectations soaring after its first-quarter report that was released at the beginning of May. A big portion of the stock's gains has been recorded over the past couple of months after the release of the first-quarter earnings report, as evident from the chart above.
This indicates that Twilio will have to keep crushing expectations in the forthcoming quarters if it is to sustain its tremendous run. The good part is that the company expects its second-quarter revenue to increase 34% annually at the midpoint of its $365 million to $370 million guidance range. Wall Street would have settled for $336.9 million in revenue this quarter.
Twilio saw an increase of 25% in daily sign-up activity in the last two weeks of the quarter as compared to the first 11 weeks as the pandemic forced governments to enforce lockdowns and issue shelter-at-home orders. However, corporations had to take care of their customers' queries, and that's where Twilio's offerings came into the picture.
Twilio CEO Jeff Lawson provided an example of how this has worked in the company's favor over the previous earnings conference call held in May:
Over the course of just a few weeks, developers at Comcast integrated Twilio Voice into their homegrown customer database, enabling technicians and customer care to contact customers for service requests remotely. They also initiated a pilot to incorporate Twilio Video into the same database, which could enable a customer to use the camera on their phone to show a Comcast technician their setup and the technician can walk them through a self-diagnosis and repair without ever stepping foot in their home.
This was one of many examples of organizations speeding up their shift to a cloud-based contact center platform in the wake of the pandemic. And this transition may not be slowing down any time soon, as the recent spike in the number of infections in the U.S. and across the globe could lead to the slower reopening of business activities or the imposition of stricter lockdowns.
As a result, organizations will have to move their contact center operations to the cloud so that customer service associates can work from home.
Call center software provider NICE inContact recently conducted a survey of nearly 800 contact center decision-makers across the U.S., Canada, U.K., and Australia. The results revealed that 66% of the respondents are looking to accelerate the shift to cloud-based contact centers. Additionally, 70% of respondents plan to stick to a work-from-home model for their customer service associates even after the pandemic is over.
That's not surprising, as the setup costs of a cloud-based contact center are substantially lower than operating a physical one, while operating costs also remain low since the organization doesn't need to invest in a lot of hardware or office space.
What should investors do?
In all, it won't be surprising to see Twilio land more customers and score more business from the existing ones. In the first quarter, the company had 190,000 active customer accounts, an increase of 23% over the prior-year period.
But more importantly, the dollar-based net expansion rate for Twilio stood at 143% during the quarter, a small increase of one percentage point over the prior-year period. This metric is an important indicator of Twilio's future growth, as an increase in the same indicates that its existing customers are spending more money on its offerings.
The company explains that the metric "increases when such active customer accounts increase their usage of a product, extend their usage of a product to new applications, or adopt a new product." This trend of increased spending by Twilio's customers and the expansion of its customer base can be expected to continue if the accelerated transition to the cloud is indeed happening.
As such, investors holding Twilio should keep riding the gravy train, though they should be aware that any sign of a slowdown in the company's growth could lead to panic selling given its massive gains. As for someone who has missed the ride so far, they will have to pay a rich premium as Twilio is trading at 25 times sales.
This isn't surprising, as the cloud communications specialist is delivering substantial growth at a time when many companies are struggling because of the pandemic, but it could turn out to be worth the money if the growth trajectory continues.
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