The deployment of AI in the cloud communications market could give this tech stock a nice boost in the long run.
Technology stocks are in terrific form so far this year, which is evident from the 26% gains clocked by the Nasdaq-100 Technology Sector index in 2023. Cloud communications specialist Twilio (TWLO 1.73%) is one of the beneficiaries of this rally. Share prices of Twilio are up 20% in 2023.
But the stock has lost some momentum recently, falling 9% in the past three months. One reason is likely concerns from investors that its growth is slowing. First-quarter results, released on May 9, reaffirmed those fears and the stock plunged substantially.
But a closer look at Twilio's business suggests that now could be a good time to buy this cloud stock, especially considering that it could win big from artificial intelligence (AI). Let's look at why it could regain its mojo.
Twilio investors need to look at the bigger picture
First-quarter revenue of $1 billion was 15% better than the year-ago quarter. Adjusted earnings increased to $0.47 per share as compared to break-even in the prior-year period. Twilio's robust year-over-year growth was driven by an increase in the company's customer base and an improvement in customer spending.
It finished the quarter with 300,000 active customer accounts, an increase of 12% over last year. It also reported a dollar-based net expansion rate of 106% for the quarter. This metric compares the amount of money spent by Twilio's customer base in a particular quarter to the amount spent by those same customers in the year-ago period. So, a reading of more than 100% means that Twilio's customers increased their spending on the company's offerings.
But the company's outlook upset things. Twilio expects $985 million in revenue in the current quarter, a jump of just 5% over the year-ago period. Wall Street was looking for $1.05 billion in revenue. CEO Jeff Lawson said on the latest earnings conference call that macroeconomic challenges are hurting consumer spending patterns. Still, the company is focusing on enhancing its sales infrastructure despite the ongoing headwinds.
That's not surprising; the company is a key player in a market that's built for long-term growth. The communication-platform-as-a-service (CPaaS) market in which Twilio operates was worth an estimated $11.6 billion last year, according to Polaris Market Research. The company's 2022 revenue of $3.8 billion suggests that it controls nearly a third of this space.
The research firm forecasts that the CPaaS market could clock 31% annual growth over the next decade and generate $173 billion in annual revenue in 2032. So Twilio's slowdown is likely to be temporary. An improvement in the pace of CPaaS customer spending should accelerate the company's growth, which explains why analysts anticipate an improvement over the next couple of years.
What's more, consensus estimates indicate that Twilio's earnings could double every year for the next five years. This doesn't seem surprising because the growing application of AI in the CPaaS market could give the company a much-needed boost.
AI could become a major catalyst for Twilio
Twilio and its peers helped change the way companies communicate with their customers. Its application programming interfaces (APIs) removed the need for companies to maintain brick-and-mortar contact centers.
As a result, organizations don't need to invest in infrastructure such as office space or computers. They can simply give their customer service associates access to Twilio's APIs using a laptop and the internet to connect with customers through multiple channels such as messages, chats, video, voice, and email.
This allowed organizations to reduce operating costs while better-serving customers as service associates can now be reached outside of the usual office hours. And now, AI is bringing in the next wave of change in the contact center market. According to Mordor Intelligence, AI deployment in contact centers is expected to increase at an annual pace of 26% through 2028, driven by the growing adoption of applications such as chatbots.
AI-enabled chatbots will allow companies to serve customers around the clock by enabling them to resolve their own issues using messages and eliminate the need for a phone call, saving a customer service agent's time. Also, the predictive abilities of AI mean that customers can get faster responses to their queries or be connected to the appropriate agent quickly.
So AI is expected to help businesses reduce customer service costs while simultaneously improving the experience for customers. Twilio can make the most of this opportunity since its APIs allow its clients to build chatbots. The Twilio Flex contact-center platform uses OpenAI's algorithms to integrate ChatGPT and GPT-4 using plug-ins providing AI-powered responses. It can also provide summaries of long messages, and analyze customers' responses.
So by using AI within the CPaaS market, Twilio could unlock another growth opportunity.
Buying Twilio stock is a no-brainer
Near-term growth is likely to be affected by short-term headwinds, but there's a massive addressable market that the company can tap. That's why now would be a great time to buy Twilio stock since it is trading at just 2.7 times sales, versus its five-year average price-to-sales ratio of 16.
Analysts expect Twilio to deliver adjusted earnings of $1.42 per share this year, which would be a big improvement over last year's loss of $0.15 per share. This also explains why Twilio's street-high price target is $110, among 28 analysts covering the stock.
That's an 86% upside from Twilio's current stock price, and it could hit the target once CPaaS spending picks up and more companies choose AI-powered customer service solutions. So the current valuation makes it an attractive AI stock, and investors might want to seize the opportunity before it flies higher.
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Originally posted on Fool.com