Twilio Inc: Buy the Dip?

A man uses a smartphone.

It's been tough to hold Twilio (NYSE: TWLO) through all its peaks and troughs since its IPO last June. After making its public debut at $15, the stock surged to nearly $70 in late September before tumbling all the way back to the mid-$20s.

Twilio dashed any hopes of a quick recovery in early May, when it followed up a solid first quarter beat with the devastating disclosure that its top customer, Uber , would pivot away from Twilio's cloud service in favor of internally developed solutions.

But after dropping to the low-$20s on the news, Twilio stock slightly rebounded and seemingly stabilized. Is it time to take a chance on this beaten-down growth stock, or should investors stay away? Let's take a closer look at the bull and bear cases to decide.

Reasons to be bullish on Twilio

Twilio's cloud service enables developers to easily integrate features like voice calls, phone number searches, SMS messages, and streaming video into their own apps. In the past, developers created those services from scratch, which was buggy and time-consuming. With Twilio, developers can simply subscribe to the cloud service and add those features via APIs -- which is cheaper, more scalable, and more reliable.

Demand for that all-in-one service is rising. That's why Twilio's Active Customer Accounts rose 42% annually to 40,696 last quarter, and why its revenue rose 47% to $87.4 million. The gradual loss of Uber's revenue is troubling, but analysts still expect Twilio's total revenue to rise 30% this year and 27% next year as new customers offset that loss.

Twilio is also expanding its ecosystem with new services which can boost its revenue per customer while locking them in. This expansion includes new enterprise and security services; new chat, fax, and notification features; and a deepening partnership with Amazon (NASDAQ: AMZN) Web Services (AWS), the biggest cloud platform in the world. Twilio also recently introduced Functions, a "serverless" platform that enables developers to run code on demand instead of relying on servers constantly "waiting" in the background.

All these new features bolster Twilio's "dollar-based net expansion rate," which measures its revenue growth per customer . That key figure rose 141% annually last quarter, indicating that it can squeeze out more revenue per customer to offset a slowdown in its active customer growth.

Twilio also recently hired Salesforce 's (NYSE: CRM) former COO George Hu as its new COO -- indicating that it plans to grow beyond its initial niche. Lastly, Twilio's "best in breed" niche position also makes it a potential takeover target for Amazon, which could expand AWS' ever-growing list of features; Facebook , which already pays Twilio for providing services for Messenger and WhatsApp; or big wireless carriers that want to profit from the development of mobile apps.

Reasons to be bearish on Twilio

The biggest problem with Twilio is its lack of profits. The company projects a non-GAAP loss of $0.27 to $0.30 per share this year, compared to a loss of $0.16 per share in 2016. Its GAAP loss has narrowed year-over-year, but it also remains deep in the red.

This bottom line pain is typical for cloud SaaS (software as a service) companies due to the high costs of securing new customers and tough price competition. That's why even Salesforce, which generated $8.4 billion in revenue last year, still can't post consistent GAAP profits every quarter.

Twilio's cash and equivalents fell from $305.7 million at the end of 2016 to just $118.4 million at the end of the first quarter. If that cash burn rate continues, it might issue another secondary offering -- which could cause the stock to drop, based on the market reaction to Twilio's previous secondary offering last October. Twilio's weak cash position could also hamper its ability to compete effectively against Vonage 's (NYSE: VG) similar platform Nexmo, which stole a portion of Lyft 's business from Twilio earlier this year.

Twilio stock also isn't cheap at 7.3 times sales, which is higher than the industry average of 5.8 for application software makers. Twilio's insiders also don't seem confident, with the number of sells eclipsing the number of purchases over the past 12 months. Lastly, investors are still betting heavily against the stock, with 27% of the float being shorted as of May 25.

So is it time to buy the dip?

Twilio remains a coin flip at current prices. Better-than-expected growth figures, fresh partnerships, takeover buzz, or other positive headlines could all spark a short squeeze and send the stock surging. However, the loss of other major customers, widening losses, another secondary offering, and its high valuation could all sink the stock. Therefore, I believe that Twilio could either double your investment or cut in half in a very short time.

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Leo Sun owns shares of Amazon and Twilio. The Motley Fool owns shares of and recommends Amazon and FB. The Motley Fool recommends and Twilio. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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