Is the recent fall in the Twilio share price warranted?

The Twilio [TWLO] share price has been dropping in recent weeks. Shares in the software-as-a-service (SaaS) stock are down 7.6% in the past month and were trading at $337 on 14 September.

The Twilio share price has been flat since the start of 2021 and is up by just 0.4% as of 14 September. Although the stock has climbed 22.3% from its year-to-date low of $275.60 during intraday trading on 13 May, the Twilio share price is down 26.3% from peaking at an all-time high of $457.30 set on 18 February.

Is the Twilio share price performance during the past month just a glitch, or are there long-term factors at play?

Earnings weighed down by acquisitions

The cloud communications company, which was co-founded by CEO Jeffrey Lawson (pictured), had a mixed second quarter. Revenue for the three months to the end of June was up 67% year-over-year to $668m, while it reported a non-GAAP loss of $0.11 per share versus a non-GAAP profit of $0.09 per share in the year-ago quarter.

Despite earnings falling from the second quarter of 2020, overall earnings beat analyst estimates, who had been expecting Twilio to report a $0.13 loss on revenue of $598m.

For the three months to the end of September, Twilio is expecting a loss of between $0.14 to $0.17 per share on revenue of $675m, which would be a marked improvement on the non-GAAP loss of $0.79 on $448m revenue reported in the third quarter of 2020. Analysts have forecast a loss of $0.07 on $636.4m.

The Twilio share price has struggled for momentum since the second quarter 2021 earnings call at the end of July. As of the close on 9 September, Twilio had a market cap of $62.47bn, despite having never posted a trailing-12-month-EPS profit. Its price-to-sales ratio was 27.7, significantly higher than the industry average for SaaS stocks.

Twilio’s overall earnings history looks weak, and earnings growth has been declining sequentially in recent quarters as the company’s net loss has widened because of ramping up its acquisition strategy. In May, the company announced it had purchased Ionic Security, ZipWhip and ValueFirst, for undisclosed amounts. Last October, it bought customer data platform Segment for $3.2bn.

A durable growth story

Although it could be argued the fundamentals indicate that Twilio is relatively overvalued, analysts don’t appear to be too concerned. It has 23 buy ratings and a hold rating, according to MarketBeat data. The consensus target for the Twilio share price is $459.52, which implies an upside of 36.3% from its 14 September closing price.

Mizuho Securities analyst Siti Panigrahi recently boosted his target for the Twilio share price from $400 to $430, which implies a 27.6% upside from its 14 September closing price.

In a note to clients seen by CNBC, Panigrahi argued Segment’s platform would bring “significant value for Twilio to become a leading customer engagement platform”. “We continue to see the company as a significant beneficiary of post-Covid-19 digitisation efforts … Longer-term, we view Twilio as a durable growth story, one benefiting from several secular tailwinds including the proliferation of the API economy, adoption of multichannel communication, and growth in cloud contact centres,” he added.

“We continue to see the company as a significant beneficiary of post-Covid-19 digitisation efforts … Longer-term, we view Twilio as a durable growth story, one benefiting from several secular tailwinds including the proliferation of the API economy, adoption of multichannel communication, and growth in cloud contact centres” - Mizuho Securities analyst Siti Panigrahi

Panigrahi described the third-quarter guidance issued by Twilio as “conservative” despite the challenges in providing year-over-year comparisons for the second half of the fiscal year “due to a lack of political traffic and other one-time pandemic-related benefits”.

Twilio’s revenue growth is forecast to slow down in the near term. Analysts estimate that the fiscal year 2022 sales will be $3.44bn, up 29.13% on the $2.66bn revenue it is expected to bring in by the end of 2021. Last year’s revenue was $1.76bn.

The Twilio share price was recently trading at 18.1 times fiscal year 2022 forecast revenue. This means the stock could be considered an undervalued play in the SaaS sector when compared with other big-name stocks. For example, Cloudflare [NET] and Snowflake [SNOW] are trading at 49 and 52.3 times fiscal year 2022 forecast revenue.

Twilio is a popular stock to hold among many technology and software ETFs. ARK Next Generation Internet ETF [ARKW] has assigned it a 3.77% weighting, and the fund has returned 5.43% year-to-date. The stock accounts for 3.95% of Global X Cloud Computing ETF’s [CLOU] total holdings, with the fund returning 2.37% year-to-date.