Twilio: Market Pessimism Is Exactly Why Buyers Should Load Up Now

Twilio Inc. (NYSE:TWLO) investors have not seen sustained progress in its price action since my previous update in late May, as TWLO underperformed the S&P 500 (SPX) (SPY). However, Twilio has come a long way from its October 2022 lows, suggesting the worst is likely over.

It's essential to consider Twilio not as a SaaS provider, given its usage-based revenue model. The company remains in the nascent stages of bolstering its operating leverage. Furthermore, the ongoing optimization in customer spending and its usual SMB focus are expected to hamper the company's efforts to boast significant topline upside in the near term.

Notwithstanding these headwinds, Gartner considers Twilio a best-in-class communications platform in its recent Magic Quadrant for CPaaS update. Accordingly, Twilio is recognized as a "Leader" with the "highest position for its ability to execute." As such, I believe it corroborates Twilio's market leadership among its peers and its network effect and switching costs moat.

Management highlighted in a recent September conference, stressing the opportunity for a monetization boost with generative AI. The company believes the shift from the legacy per-seat monetization model to usage-based pricing is expected to benefit companies like Twilio. Furthermore, the company's ability to cross-sell several products and services within its platform should strengthen its data advantage to leverage its generative AI capabilities.

As such, I assessed that TWLO dip-buyers likely anticipate that the company could see a much-needed uplift moving ahead as they expect rate cuts in 2024. However, the Fed's recent "hawkish pause" could have spooked some investors, suggesting a higher-for-longer positioning as the FOMC tempered rate cuts expectations next year.

I assessed that the market has justifiably raised its concern about the Fed's ability to navigate a soft landing, given its more hawkish posture entering 2024. The recent surge in Treasury yields has added a further headwind, as the 10Y yield broke above its October 2022 highs. As such, growth stocks like TWLO are expected to be hit in the near term as the market adjusts its valuation downward to account for higher implied discount rates.

TWLO remains attractively priced, assigned a "B" valuation grade by Seeking Alpha Quant. Its best-in-class "A+" growth grade indicates that the market has not reflected its growth potential in its valuation. As highlighted earlier, I assessed that market operators are likely pricing in higher execution risks, given uncertain macroeconomic conditions, higher interest rates for an extended period, and its more exposed SMB base.

However, I believe it's critical to assess whether it's opportune for high-conviction investors to add more exposure while the market remains pessimistic in its posture.

I assessed that TWLO has decisively bottomed out in October 2022. The transitory scare in March 2023 (amid the throes of the regional banking crisis) was also robustly defended as dip buyers rushed in to normalize the initial capitulation.

As such, TWLO buyers have attempted to hold its nascent consolidation zone above the $56 level. That level must be defended resolutely for TWLO to regain its uptrend bias, which remains relatively tenuous. However, TWLO's price action is increasingly constructive, lending credence to my ongoing recovery thesis.

However, an overhead resistance at the $71 level suggests investors should remain cautious about adding too close to that zone for now. Therefore, the recent pullback has offered TWLO investors another opportunity to load up, as it has dropped close to its August support zone.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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