Why Twilio Is Ready for a Turnaround

Wall Street has been harsh on Twilio (NYSE: TWLO) this year, as concerns about key customers switching to in-house solutions have overshadowed its terrific financial growth. The cloud communications platform specialist has massively underperformed the market this year, which doesn't seem logical given its consistently rising revenue, stable margin performance (despite being in the early stages of growth), and a robust outlook.

TWLO data by YCharts

In fact, Twilio had beaten expectations quite comfortably in the last-reported quarter. It also raised its annual guidance thanks to a sizable long-term enterprise licensing deal with an unnamed tech customer, which is reportedly worth close to eight figures and will run for three years. Still, investors have maintained a safe distance from this fast-growing tech stock. Will there be a change in perception in the New Year? Let's find out.

Twilio's customer diversification could boost investor confidence

A turnaround at Twilio might seem like a pipe dream after Uber decided to multisource its cloud communications platform. In May 2017, Twilio revealed that the ride-hailing specialist could either develop an in-house cloud communications platform or look at other third-party providers in a bid to reduce its dependence on just one vendor. Since Uber supplied 12% of Twilio's revenue at that time, the company had to slash its full-year sales growth estimate, leading to a massive sell-off.

But investors shouldn't forget that Uber has a minimum revenue commitment, and it isn't dropping Twilio's services altogether. Moreover, Uber's clout on Twilio's top line has been on the wane. More specifically, Uber supplied just 5% of Twilio's third-quarter 2017 revenue, down from 17% in the fourth quarter of the preceding fiscal year.

Despite this decline in Uber-related revenue, Twilio's base revenue was up 43% in the last reported quarter. The base revenue excludes business from those customers who haven't entered into a minimum 12-month contract with the company. Therefore, the base revenue is effectively business from those customers who have struck long-term agreements with the company, and this metric improved by a big margin last quarter.

Twilio's base revenue grew 63% year over year last quarter after excluding Uber, thanks to the company's focus on aggressively expanding its customer base. Twilio's active customer accounts grew almost 35% year over year during the third quarter. The company has done well to reduce customer concentration, with WhatsApp becoming its biggest supplier of revenue with a contribution of just 6%.

The customer diversification exercise is creating a positive impact on Twilio's top line, as it recently raised its full-year revenue forecast to $387.5 million at the midpoint from the previous $373 million.

Twilio could soon change investor perception if it keeps delivering such upbeat guidance numbers, and this looks quite likely given its recent product development moves.

Attract more customers

Twilio is going all out to expand its ecosystem by opening up its platform to as many customers as possible. The company's solutions have so far been used by software developers to build communications platforms for their companies, but its recently launched Twilio Studio will enable nontechnical employees to build applications of their own.

Twilio Studio's visual drag-and-drop editor makes it easy for marketers, support engineers, designers, and others to either create or make changes to the system. For instance, a software developer can build a solution and then pass it on to the business people to tweak the same accordingly. This reduces development times for Twilio's customers and increases the appeal of its platform.

Additionally, Twilio is trying to tap into emerging tech trends to boost its business. A couple of months ago, the company announced a new functionality that allows developers to create augmented reality (AR) apps by integrating audio, video, and data communication capabilities into a single platform.

Twilio is trying to change the way corporations interact with their customers with the help of AR. For example, a customer can simply point his or her smartphone at the cable TV box, helping the cable company associate diagnose what's wrong. The customer service associate can then overlay instructions on the mobile device to rectify any problem.

This eliminates the need for long telephone conversations with customer center representatives, helping the corporation reduce costs and also deliver an improved customer experience. This type of innovation in customer management could be a big deal for Twilio, as the customer experience management market is expected to almost triple in the next five years.

Therefore, Twilio is pulling the right strings to boost its customer base. Not surprisingly, analysts expect the company's top line to jump over 24% in the next fiscal year, while its bottom line is expected to grow over 56%. Twilio could sustain this impressive momentum in the long run with estimated annual earnings growth of 20% over the next five years, making it a smart buy.

10 stocks we like better than TwilioWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Twilio wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Twilio. The Motley Fool has a disclosure policy.