On Wednesday, HSBC analyst Stephen Bersey downgraded shares of Twilio (NYSE:TWLO) from Hold to Reduce, adjusting the price target to $61 from the previous $62. The downgrade reflects a shift in HSBC's valuation approach for Twilio, from price-to-sales to price-to-earnings, acknowledging Twilio's transition from a high-growth, no-profit company to one with a greater focus on profitability.
Twilio's management has recently pivoted its operating strategy to prioritize margin improvement in light of slowing revenue growth. The year-over-year revenue increase for the third quarter of 2023 was reported at 5.2%, a significant drop from the 61.3% growth seen in 2021. Despite the deceleration in revenue, Twilio's non-GAAP operating margin exhibited a positive swing, reaching 13.2% from a mere 0.1% during the same period.
As part of its new strategy, Twilio has undertaken substantial cost-cutting measures, including reducing its workforce by approximately 28% through two rounds of layoffs since September 2022. Concerns are emerging that these cuts may be excessively deep, potentially undermining the company's capacity for product innovation and future revenue growth.
The analyst also highlighted challenges within Twilio's core communications business, which accounted for 88% of revenue in the third quarter of 2023. This segment is experiencing heightened competition. Additionally, Twilio's efforts to grow its Data and Applications segment have yet to achieve meaningful success and scale, adding to the challenges faced by the company in its pursuit of sustained growth.
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