1 Incredibly Cheap Stock Down 21% to Buy Before It Rises 95%

Twilio (TWLO -2.21%) investors have had a year to forget so far. The cloud communications specialist’s shares have lost 21% of their value in 2024, but the bright side is that recent share price action points to a turnaround in its fortunes.

Shares have gained 9% over the past two months, and its 2024 second-quarter results have given investors reason to apply. Let’s take a look at what’s been working in Twilio’s favor lately and take a look at possible reasons why this tech stock could offer more long-term returns.

Twilio’s improving customer base could help reignite its growth

Twilio reported a 4% year-over-year increase in second-quarter revenue to $1.08 billion, with year-over-year organic revenue growth of 7%. The top line beat Twilio’s initial guidance range of $1.05 billion to $1.06 billion.

The company’s non-GAAP earnings rose to $0.87 per share from $0.54 per share in the same quarter last year, thanks to its focus on cost reduction. Twilio initially expected to reach $0.64 per share to $0.68 per share. So the big earnings beat was enough to send Twilio stock up nearly 12% after it released its earnings on August 1st.

There were other positive takeaways for investors. Twilio reported 316,000 active customer accounts at the end of the previous quarter, up from 304,000 in the same period last year. In addition, the company saw a slight improvement in customer spending, as the dollar-based net expansion rate reached 102% in the last quarter.

This metric compares Twilio customer spending in a given quarter to the same customer spending in the same period last year. An improvement in the dollar-based net expansion rate means that the company is getting more money from its existing customer base. The year-over-year increase in the net dollar-based expansion rate may not be appealing, but investors should note that the company may be able to drive higher customer spending in the future due to its adoption of artificial intelligence (AI). . ) in the customer service space.

Twilio’s cloud communications platform enables businesses to reach their customers through various channels such as voice, text, video, email and more. Twilio’s management pointed out on its recent earnings conference call that its AI-integrated products are now gaining traction among customers. As Khozema CEO Z. Shipchandler pointed out:

This quarter, we started to see success with our newer, higher margin software products. These are products that leverage AI, such as Verify and Voice Intelligence, as well as platform innovations that natively incorporate AI and machine learning, such as the Traffic Optimization Engine and Engagement Suite to drive greater deliverability and engagement better customer experience.

The company expects these products to move the needle in a bigger way in the long run. This will come as no surprise, as AI adoption in the customer service market is expected to grow at an annual rate of 24% through 2033, generating $3.2 billion in revenue by the end of the forecast period. Meanwhile, the size of the communications platform as a service (CPaaS) in which Twilio operates is expected to grow from $15 billion in 2023 to $119 billion in 2031.

All of this indicates that Twilio’s growth could accelerate over time, especially given that it has built a solid customer base and stands to gain from the adoption of new technologies like AI in its industry.

A healthy earnings growth could help the stock deliver solid gains

Analysts have raised their earnings growth expectations for Twilio of late.

TWLO EPS estimates for current fiscal year data by YCharts.

The bright side is that Twilio is expected to maintain an annual earnings growth rate of nearly 20% over the next five years. Based on its 2023 earnings of $2.45 per share, its bottom line could rise to $6.09 per share in 2028. Twilio currently has a forward price-to-earnings ratio of 19, which is a discount to average US tech sector earnings multiple. 44.

Assuming it continues to trade at this attractive valuation after five years and manages to deliver earnings of $6.09 per share, its stock price could rise to $116 per share. That would be a 95% increase from current levels. So there’s a good chance that Twilio can sustain its recent rally in the long term. That’s why investors looking to buy a growth stock that’s trading at a cheap valuation might want to buy it before it goes up.