1 big reason to buy Twilio shares after Q3 2021 earnings bombshell

The market was not at all happy with Twilio‘s (NYSE: TWLO) Q3 2021 results update. Shares have plunged nearly 20% as a result of the report, and while the stock has rallied slightly since then, Twilio is down 11% so far in 2021 with only two months to go.

A larger than expected loss in the third quarter was to blame. It’s no surprise that some investors are losing patience with Twilio’s lack of profitability. After all, it is now a massive digital communications company that has made over $ 2.5 billion in sales in the past 12 months. However, according to a valuation measure, Twilio is now as cheap as it has been for over a year and could be a fantastic buy for the investor in the very long term.

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The good and bad quarterly figures

Headline wise, some aspects of Twilio’s Q3 were exceptionally good. Revenue of $ 740 million represents a 65% year-over-year increase, erasing management’s outlook for as much as $ 680 million provided a few months earlier. Adjusted earnings per share of $ 0.01 was also much better than that of $ 0.14 per share loss the company had said it was on the lookout. The fourth quarter forecast for revenue growth of up to 40%, although small compared to the third quarter results, could be easily exceeded, as Twilio tends to under-promise and over-deliver.

So what’s the problem ? On an unadjusted basis (which includes non-cash expenses like stock-based compensation, amortization of intangibles, etc.) Twilio’s net loss amounted to $ 224 million in the third quarter, nearly double the net loss of $ 117 million in the same period last year. Keep in mind that this doesn’t mean that Twilio’s cash, cash equivalents and short-term investments (which totaled $ 5.39 billion at the end of September) evaporated from $ 224 million in the third quarter alone. . Free cash flow, which excludes non-cash expenses, was “only” negative by $ 89.4 million in the first nine months of 2021, excluding the purchase of the analytics company segment customer data last November.

Over the past year, Twilio has also added just over 20% to its average number of outstanding shares through stock-based employee compensation and segment buying. The company’s revenues have far exceeded this figure, but some investors are clearly unhappy with the continued aggressive pace of spending to promote growth.

One of the reasons the action is a buy, but for whom?

While Twilio’s third quarter was a jumble of information that could be taken positively or negatively depending on your investing style, Twilio as a business is still in high growth mode. Enduring large losses is not for all investors. However, if you have many years buy and wait, and may increase your stake in Twilio over time (while simultaneously maintaining a diverse portfolio of other investments), this stock could be a great buy again right now.

In fact, based on the selling price, Twilio is cheaper than it has been since the first half of 2020. Of course, measured by the value of the company (currently at almost $ 48 billion) , the company is much bigger than it used to be. a few years ago, even after the stock fell after earnings. But despite its size, Twilio clearly has no trouble finding ways to grow its business.

TWLO PS Ratio Graph

TWLO PS Ratio given by YCharts

Remember, this company is for ultra long term investors. Even the Twilio management team is pretty clear on this. They pledged to list certain stocks on a new exchange called, in an uncreative way, the Long Term Exchange (LTSE), in order to reinforce the nature of the company’s vision of building an iconic brand that will create wealth. for all stakeholders for many generations to come. . For now, that will mean patiently putting up with the red ink when Twilio does his quarterly reports.

Owning this kind of business may not be your style, and that’s okay. But for those who adhere to Twilio’s goal of becoming the fuel for all kinds of digital communications present and future, there was much to be said for in the Q3 report. The company is issuing a lot of new shares to promote its expansion, but its sales growth rate is much faster. With the stock valuation having undergone a major haircut, now it seems time to add to an existing long-term position.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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