Why Twilio Remains a Top Growth Pick

Twilio (NYSE: TWLO) stock took a breather right after the company's fiscal fourth-quarter results in mid-February put its growing pains in the spotlight.

Although the cloud communications specialist crushed Wall Street's revenue estimates handsomely last quarter as it blew past the upper end of its own guidance range by a wide margin, investors took issue with Twilio's weaker-than-expected adjusted earnings, which arrived at $0.04 a share. Analysts were looking for EPS between $0.03 and $0.10. Additionally, Twilio's guidance for the current quarter turned out to be disappointing. It expects adjusted earnings between breakeven and $0.01 per share, missing the $0.02 consensus estimate.

But the market is focusing on the wrong things. Twilio is on the right path and could keep delivering impressive growth in the future. Here's why.

Here's what investors should be focusing on

Twilio's fourth-quarter revenue shot up 77% year over year to $204.3 million, which was much faster than the 31% growth in its active customer accounts. This clearly shows that the company is getting get more business from each customer, which is evident from the rapid growth of the dollar-based net expansion rate metric.

According to Twilio, the dollar-based net expansion rate goes up when active customers "increase their usage of a product, extend their usage of a product to new applications or adopt a new product." The great part is that this metric shot up a record 147% last quarter, continuing its trend of breaking to new highs with each passing quarter.

Not surprisingly, Twilio expects to break the $1 billion sales mark in 2019 thanks to an expected 65% top-line jump. That's really impressive considering that its 2018 sales grew 63%. Another important thing of note is that more of its customers are entering into long-term contracts.

Twilio's base revenue, which represents sales to those active customer accounts that have signed a 12-month minimum revenue contribution contract, shot up 77% last quarter to $186.2 million, accounting for more than 91% of its total sales. This is a big positive for Twilio, as the massive jump in this metric indicates the stickiness of its products and services, which should eventually result in long-term growth.

Don't worry about the bottom line for now

Twilio's weaker-than-anticipated earnings guidance seems to have given investors some cause for concern, but that shouldn't be the case, because it is progressing in the right direction. The company might have missed Wall Street's bottom-line expectations last quarter, but investors shouldn't ignore the fact its non-GAAP net income of $0.04 per share was a massive improvement over the prior-year period's loss of $0.03 per share.

For the full year, Twilio delivered non-GAAP net income of $11.4 million, or $0.11 per share, compared to a loss of $17.7 million in 2017. The company expects its non-GAAP net income to range between $0.08 and $0.11 per share in 2019. Now, the midpoint of that guidance suggests that Twilio expects its earnings to decline slightly this year, but investors shouldn't worry much about that right now.

We have already seen that Twilio is able to extract more revenue out of its customer base by selling them more of its solutions. This should eventually help it bring down its outlay on line items like sales and marketing, but for now, Twilio's decision to spend more money on customer acquisition seems to be the right one.

The company spent 29% of its revenue on sales and marketing last quarter, up from 24% in the prior-year period. That makes sense considering that the likes of Bandwidth and Vonage's Nexmo are trying to cut into this market, and spending more money on customer acquisition will help Twilio stay ahead of the field.

In the end, it's clear that Twilio is pulling all the right strings to deliver yet another year of fantastic growth. Its customer count is going up rapidly and demand for its services is increasing at the same time. Moreover, the company has pulled itself into the black on a non-GAAP basis, and guidance suggests it will maintain that status this year.

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