Why Twilio Shares Sank Today

Key Points

• Twilio recorded an impressive quarter, but it appears revenue growth will slow and margins will compress in the quarter ahead.

• Shares may look cheap on a non-GAAP basis, but the company pays high stock-based compensation to employees.

• That being said, the company is buying back stock to offset the high SBC.

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Shares of Twilio (NYSE: TWLO) fell 18.9% on Friday, as of 3:47 p.m. ET.

Twilio reported earnings last night, and while results beat analyst expectations on all counts, it seems the company's guidance disappointed -- enough to cause today's severe sell-off.

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Twilio has a strong quarter but weaker outlook

In the second quarter, Twilio grew revenue 13% to $1.23 billion, with adjusted (non-GAAP) earnings per share of $1.19. Both figures handily beat analyst expectations. Underlying metrics were also strong, with the total customer count up 10% year over year and the dollar-based net expansion rate -- how much money existing customers grew their spending relative to last year, net of churn -- came in at 108%, an acceleration over the 102% rate in the year-ago quarter.

However, when it came to third-quarter guidance, Twilio may have left some wanting. Management projected revenue growth of 10% to 11%, a two-point deceleration, as well as compression in operating margin as it forecast $210 million in adjusted operating income. That would actually mark a sequential decrease from Q2's $221 million.

Image source: Getty Images.

Twilio is cheap by software standards, but maybe for a reason

Twilio may look quite cheap relative to other software-as-a-service stocks, as it trades at just 22 times this year's adjusted earnings estimates. However, Twilio also pays a lot of stock-based compensation to employees, which totaled $149 million in the quarter. Adding those costs back, Twilio was barely profitable.

Twilio does have an excellent balance sheet, with over $2.5 billion in cash and no debt, and it is using that cash to offset the share dilution. However, the lack of generally accepted accounting principles (GAAP) profitability may hamper the stock's ability to get back close to its 2021 highs anytime soon.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Twilio. The Motley Fool has a disclosure policy.