By Jacob Sonenshine
Software provider Twilio is executing on its growth strategy, and investors should hold on for more gains to come.
The $19 billion company sells a software "application programming interface" that enables businesses across sectors to communicate via messaging, email and voice. The company charges customers a small fee for every communication. It's a growing business, as management anticipates total corporate spending on these messaging products to hit more than $100 billion by 2028 and grow further beyond that.
Our thesis has been that Twilio has the ability to more than participate in the growth.
We've been right so far. Since our Sept. 10 recommendation, the stock is up 20% to $129. Much of this gain came after the company's third quarter financial report in late October, which beat estimates on both sales and earnings -- as we anticipated it would.
Sales of $1.3 billion grew 14.5% year over year, accelerating from 13% in the second quarter. Partly driving the growth is the company continuing to win new customers in messaging as it sells multiple products that customers can use to coordinate with each other, according to comments by chief revenue officer Thomas Wyatt on the earnings call. Plus, Twilio recently increased its prices, which encouragingly didn't cause many customers to move to competitors. Part of Twilio's ability to command these prices is that its messaging system rarely alerts to the wrong party.
Twilio is also using artificial intelligence to enhance its product. For example, its AI speeds up conversations by quickly understanding the content and purpose of the interaction.
Sales are driving high profit growth. With Twilio able to reach new customers without spending much more on marketing or research, its operating profit margin rose almost 2 percentage points, to 18% quarter over quarter. This drove earnings per share up 23% -- far better than analysts had forecast.
There's still more opportunity to grow over the long-term as Twilio executes its strategy.
As that story continues to unfold, the stock should gain more, especially because it's still cheap versus other software stocks. The market cap is about 3.7 times analysts' expected sales for the coming 12 months, versus an aggregate price/sales ratio of 8.3 times for the iShares Expanded Tech-Software Sector Exchange-Traded Fund. Twilio's multiple has begun to close the gap with the software group since its earnings report; more earnings like last quarter's can close the gap even further.
The key is that Twilio is growing earnings faster than the 15% annual rate analysts expect for the software fund over the coming two years, according to FactSet. "Twilio's ability to deliver durable double-digit revenue growth and free cash flow upside should support multiple expansion," writes Mizuho analyst Siti Siti Panigrahi.
Just hold on to this one.
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December 04, 2025 23:25 ET (04:25 GMT)
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