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Twilio Investors Suffer Post-Earnings Drop
Twilio Inc. (New York Stock Exchange:TWLO) investors faced a harsh reality when Twilio released its fourth-quarter earnings release in mid-February 2024. I urged investors to be careful when looking for further upside in TWLO. in my previous article At the end of December, as I anticipated, your buying momentum could stall. My caution paid off as TWLO has declined nearly 25% since my article, significantly underperforming the S&P 500 (SPX) (TO SPY).
Twilio's new CEO Khozema Shipchandler informed investors that Twilio's customer engagement platform is undergoing a strategic review. Additionally, the company also recorded impairment charges of $286 million related to its previous acquisition of the segment. Consequently, Twilio's attempt to move toward a higher-margin business has not gone well as the company explores its options.
With the departure of Twilio co-founder and former CEO Jeff Lawson from Twilio's management and board, investors likely expect significant changes, including the sale of non-core assets. Twilio management stressed that the Twilio segment business is “strategic” for the company. However, Wall Street analysts are not so sure. suggesting that “all options are on the table.” Shipchandler noted that investors should expect an update in early March on the completion of its operational review. Twilio also withheld its full-year outlook, which is likely to lead to significant post-earnings downside volatility. With the expected completion of its business review, investors should also expect a revised outlook from management, including its long-term model.
Despite its relatively attractive valuation, TWLO investors appear to have downgraded the stock. While it's possible that divesting Twilio's non-core assets could unlock value for shareholders as it divests its underperforming units, it could also hurt its nascent AI efforts. As AI hype has driven related stocks over the past year, Twilio needs to make sure it stays on top of the AI narrative. Buying sentiments have tilted significantly towards stocks with substantial exposure to AI, as seen with Nvidia (NVDA). As a result, investors will likely evaluate whether management believes the Twilio segment is truly strategic as it contemplates ways to rejuvenate its underperformance.
Uncertainties with the Twilio segment
Does the company need the Twilio segment to improve? I think so. While Twilio's communications business continued to drive 93% of its fourth-quarter revenue base, the segment posted an adjusted gross margin of 74.4%, well above Twilio's corporate average of 52%. Given the inherent gross margin disadvantage of its communications business compared to its SaaS-only peers, Twilio must rely on Segment to increase margin.
However, the unit's relative underperformance has continued to drag Twilio's path toward higher profitability, as it posted an adjusted operating margin of -24.6%, well below Twilio's corporate average of 16% in the quarter. quarter. With Twilio management committed to achieving GAAP profitability, the old days of growth at all costs will likely be a thing of the past with Lawson's departure. However, Twilio must present what can help it generate greater operating leverage gains if it decides to unleash its segment business. Additionally, the strategic value of the business suggests it could strengthen other companies with strong CRM platforms, such as Salesforce (CRM) or Adobe (ADBE). As a result, I believe the market is justified in lowering TWLO's rating to reflect significantly higher execution risks attributed to the uncertainties of its segment business.
Its valuation is likely to contain significant bearishness, as TWLO has been assigned a “B+” valuation grade and is backed by an “A-” growth grade. As a result, TWLO may still bottom at current levels even as we near the conclusion of its trading review.
Is TWLO a buy, sell or hold?
TWLO Price Chart (Weekly, Medium Term) (TradingView)
With TWLO revisiting levels seen in November 2023, I assessed that buying sentiments returned last week. If dip buyers can help TWLO constructively consolidate at current levels, it can avoid falling back towards its October 2023 lows. Consequently, it should maintain TWLO's nascent medium-term uptrend bias, which which bodes well for a later recovery. High-conviction investors willing to capitalize on recent uncertainties to buy ahead of the conclusion of Twilio's business review may consider adding exposure.
Rating: Upgrade to Buy.
Important Note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Always apply independent thinking and keep in mind that grading is not intended to time a specific input/output at the time of writing unless otherwise specified.
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