5 Reasons I Bought Twilio Inc. Stock

By Markets Fool.com

I was very bearish on Twilio (NYSE: TWLO) after the stock surged from its IPO price of $15 in June to nearly $70 in September. With the stock's price-to-sales ratio inflated to the mid-20s and short interest surging, I believed that the stock was poised for a big plunge.

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That's exactly what happened, after Twilio spooked investors by announcing a secondary offering in early October. But after the stock plummeted to the low $30s, I finally started a small position in the cloud service provider for five simple reasons.

Image source: Getty Images.

1. Robust revenue growth

Twilio's cloud service links popular mobile apps -- like Uber, Airbnb, WhatsApp, and Facebook (NASDAQ: FB) Messenger -- to mobile phone numbers and SMS. It connects Uber passengers to their drivers, helps Airbnb hosts contact guests from within the app, and enables WhatsApp and Messenger users to add each other via their phone numbers.

Demand for that service, which is offered via tiered rate and subscription plans, has been soaring. Twilio's revenue rose62% annually to $71.5 million last quarter, and active customer accounts grew 45%. The company expects its revenue to rise 61%-62% this year, compared to 88% growth in 2015.

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2. Its valuations have cooled off

In the past, my main concern with Twilio was with its valuation. However, its current P/S ratio of 11, while admittedly pricey, is now more in-line with other tech companies with comparable revenue growth.

For example, cybersecurity firm Palo Alto Networks (NYSE: PANW), which is expected to post 33% sales growth this year, trades at 10 times sales. Cloud-based healthcare CRM (customer relationship management) vendor Veeva (NYSE: VEEV), which is expected to post 29% sales growth this year, trades at 12 times sales. These comparisons indicate that Twilio's downside potential might be limited if it can keep generating explosive sales growth.

3. Its losses are narrowing

Twilio isn't profitable by either non-GAAP or GAAP metrics. Last quarter, it reported a non-GAAP loss of $0.04 per share and a GAAP loss of $0.13. However, both figures were narrower than its non-GAAP loss of $0.07 per share and its GAAP loss of $0.70 in the prior year quarter.

4. Its "best in breed" reputation

When Twilio went public, there were concerns that Facebook's WhatsApp -- which accounted for nearly a fifth of the company's revenue -- could drop the service for either a competing platform or a first-party one. However, Facebook's decision to double down and integrate Twilio with its growing Messenger platform should allay those fears.

Twilio benefits from being a first mover in a niche market. In the past, app developers had to create features like SMS and call integration from scratch. This was an expensive, time consuming, and buggy approach. As a result, "no stack" start-ups like Uber started creating a core service (like ride hailing) while outsourcing other features to "best in breed" companies.

For Uber, those companies include Alphabet'sGoogle for mapping services, PayPalfor payments, and Twilio for SMS and call services. These subscription-based solutions are also easily scalable, ensuring that apps run smoothly as their user bases grow.

5. Its widening moat

Lastly, Twilio is widening its moat with additional services for its existing customers. Last quarter, it unveiled the Twilio Enterprise Plan, a subscription product which adds security, access management, and administration tools for larger organizations.

It also introduced Voice Insights, a service which provides developers with deeper analytics of their voice application users, and agreed to buy WebRTC's media processing technologies for the development of its Twilio Programmable Video real-time voice/video platform. To reach more developers in Europe, it expanded its SIGNAL conference to London.

But don't go all-in on Twilio just yet...

Twilio has the makings of a great growth investment, but I'm not going all-in on the stock just yet. I started a position in the low $30s, but I plan to add more in the following months if the stock declines further. I'll be waiting for another buying opportunity after Twilio's lockup period expires onDec. 20 -- which might cause a temporary swoon as some insiders sell their shares.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Twilio Inc. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, PayPal Holdings, and Veeva Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.