Is The Dream Run Over Too Soon For Twilio (TWLO) Stock?

Twilio, Inc. (NYSE:T) , a cloud communications company that launched its initial public offering (IPO) in June has gained a lot of attention since then. Its share price has more than tripled from $15 a share at the time of its IPO to over $51 in just two months.

The company recently reported its first quarterly results. It fared better-than-expected on both counts. The company offers a cloud-based API that enables software developers to include communications features (voice and video calls, text messages, etc) in their apps at much lower costs.

The company also saw a robust improvement in the number of active customer accounts compared with the year-ago quarter. Twilio also provided another metric for investors called base revenues, that is, revenues from the long-term contracts. The company reported growth of 84% year over year to $56 million, a positive indicator indeed.

However,a few issues cast a shadow over its dream run.

What Makes Us Concerned?

So far Twilio investors have reaped astronomical gains but as they say real growth is seen once ‘beginners luck’ starts to wane.

When we look closely at last quarter’s numbers, the company’s sales and R&D costs were much higher when compared with the increase in its customers. This is a concern given the fact that the company is not yet profitable. Moreover, according to the Zacks model, Twilio is projected to grow at a rate of 20% over the long run, which is below the industry standard of 23%.

Furthermore, the stock’s recent surge raises some serious questions regarding its valuation as well. The company has a Value Grade of ‘F’ as per our latest style score system, indicating the possibility of a downside.

To Conclude

Twilio’s offerings have undeniably bridged the gap between businesses and the cloud. Given the increasing adoption of cloud, the company does have decent scope for growth but the path may not be as smooth as it appears.

Increasing costs and mounting competition from peers like Bandwidth, Level 3 (NYSE:T) , AT&T (NYSE:T) and Vonage (NYSE:VG) remains a headwind.

Estimate revisions for this Zacks Rank #3 (Hold) company has been mixed. Over the last 30 days, estimates for 2016 have reduced considerably while that for 2017 has increased. This indicates that over the long term, the company will get back on the growth track.