Twilio’s Hold Rating Affirmed Amid Modest Growth and Strategic Uncertainty

Peter Weed, an analyst from Bernstein, reiterated the Hold rating on Twilio (TWLO – Research Report). The associated price target is $68.00.

Peter Weed has given his Hold rating due to a combination of factors affecting Twilio’s business performance and future outlook. In the first quarter of 2024, Twilio outperformed its low-set expectations, shrinking less than the guided -4.3% quarter-over-quarter (QoQ) with a -2.7% QoQ instead. However, the forecast for the following quarter indicates only a marginal growth of +0.76% QoQ, suggesting that the company is struggling to find a strong growth trajectory. The shrinkage in the Segment business unit, which exhibits a net revenue retention (NRR) of 92% and a declining customer base, is particularly concerning. Although the Communications business unit is achieving growth, at 4% year-over-year (YoY) and a 103% NRR, this is still modest, and without the impact of a divestiture, the growth rate would have been slightly higher at 7% YoY.

The ongoing management and strategic changes within Twilio are adding a layer of uncertainty, making it difficult to place full confidence in future growth projections. While the company’s effort to pivot towards a stronger cash flow profile is commendable, particularly with the Communications business’s Non-GAAP Operating Margin (OpM) reaching mid-20% range, the underperforming Segment business with a -28% Non-GAAP OpM presents a significant obstacle to improving the company’s overall financial health. Additionally, the competitive environment and the fixed costs of underlying telecommunications are limiting the potential for gross margin expansion in the Communications business. Although potential advancements in artificial intelligence (AI) could provide opportunities for Twilio, the tangible impact of such technologies on the company’s revenue growth is not expected until 2025. Consequently, Peter Weed has adjusted the revenue model to reflect lower growth rates and updated margin guidance, resulting in a slightly reduced price target of $68 and a continuation of the Market-Perform rating.

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Twilio (TWLO) Company Description:

Founded in 2008, California-based Twilio, Inc. provides a cloud communications platform that allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions using its web service APIs (Application Programming Interfaces).