By Jacob Sonenshine

Twilio stock got rocked after reporting earnings, but the company is still likely to produce what matters most to software investors: reliable sales growth at an accelerating pace and plenty of catalysts ahead.

Twilio provides businesses with programs that enable communication across software platforms, allowing users to transfer data and coordinate different data sets. Just over half of sales came from application programming interfaces for customers' messaging, according to its January investor day presentation. The rest is from voice mail, email, and other forms of communication.

Shares are down 18% since Aug. 6, just before the San Francisco-based company reported second-quarter earnings. The stock has since rebounded to $107, but it remains below its pre-earnings level.

Second-quarter sales of $1.23 billion were up 13% year over year, and adjusted earnings per share were $1.19. Both beat estimates. Twilio even raised full-year sales guidance to $4.93 billion, implying 8.5% year-over-year sales growth in this year's second half. That wasn't enough for investors, who were eager to see forecasts of more sustained growth.

The other problem was that management left full-year operating profit guidance unchanged at $863 million, the midpoint of the range. That implies the profit margin will be 0.4 percentage point lower than previously expected. Chief Financial Officer Aidan Viggiano said on the earnings call that Twilio plans to spend more than initially forecast on research and development as it seeks to meet customer demand for new products, especially programs with artificial-intelligence features. The good news is that demand itself remains robust, and adding AI features will only enhance its products' attractiveness.

For now, growth concerns and the spending Twilio might need to support it are weighing on the stock. But these concerns may be shortsighted, and there are indications they have already begun to subside. With the stock already recovering some ground, the market is zeroing in on how Twilio can reaccelerate its growth and margins. If it succeeds, this would surely bring about rapid earnings growth and stock price gains. International expansion could provide another growth opportunity. The company has said it wants to boost revenue globally, as only about a third of its sales come from outside the U.S.

Twilio charges customers a fee of a few cents per communication. While this reduces cost certainty for the customer, it also allows Twilio to boost revenue as use expands. Many businesses worldwide are still in the early stage of adopting tools to more efficiently communicate, making for substantial growth potential for Twilio's products. Total spend on this service can reach $119 billion globally by 2028 and continue growing from there, according to management estimates provided at its investor day in January. Twilio competes primarily against Sinch and Infobip, both of which have been producing lower sales.

Twilio's revenue model does also present some risks, given that slowing economic growth would curtail corporate activities more generally and therefore reduce the frequency of business communications, all of which would have a negative impact on its business. But the global economy has continued to expand, even if more slowly, and Twilio has more than 300,000 active accounts spread across industries and 180 countries.

Other factors also speak to Twilio's prospects. For starters, management's growth guidance is likely conservative, as it usually prefers to underpromise and overdeliver on financial results. Twilio hasn't missed sales expectations in at least 20 consecutive quarters, according to FactSet. Its average revenue result is 5.2% above expectations. If the company beats sales forecasts by that amount in the second half, its third and fourth quarter combined revenue will have grown 14.5% year over year.

Twilio also recently implemented a price increase for U.S. messaging and voice customers. Mizuho analyst Siti Panigrahi writes that the hike will show up in growth figures this year and for some of 2026. That shouldn't hurt customer count, he argues, given that "Twilio has not seen any pushback and believes its best-in-class offerings warrant premium pricing."

Consistent with that, customers should be willing to pay up for what has been a valuable product. Twilio saves customers money, Needham analyst Josh Reilly says, because its system has proven to be reliable. This reduces the number of messages customers send, enables faster interactions, and translates into fewer dollars spent. According to Reilly, "They're positioned to take market share."

For these reasons, he sees better growth in the long term than management currently forecasts. Holding some costs constant, and assuming the price increase doesn't damage demand, margins could surpass expectations over time, especially as the company moves past what should be a near-term increase in R&D spending.

That's why Panagrahi sees the operating margin rising next year to 19.5% from 17.6%, bringing EPS growth to 18%. He, along with others bullish on the company, sees Twilio sustaining such growth for the longer term.

That's enough to push the stock higher, especially as it trades at just 3.2 times expected sales for the coming 12 months. That's below the 10.6 times for the average software company in the iShares Expanded Tech-Software exchange-traded fund. That gap should close as Twilio proves that it's able to grow aggressively for years.

Forget the superexpensive Microsofts and Oracles of the world -- and buy Twilio.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com.

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September 10, 2025 01:00 ET (05:00 GMT)

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