Twillio Stock: AI Future Isn’t Here Yet (NYSE:TWLO)

Twilio (NYSE:TWLO) trades at the yearly highs despite the founding CEO exiting the business. The company has an interesting AI communications software future, though the actual financial predictions are limited. My investment thesis is more Neutral on the stock after the Q4 rally and the departure of Jeff Lawson.

AI Software Struggles

Twilio isn’t alone as a company with a promising communications and software future due to AI, yet the business isn’t growing yet. The company only guided to upwards of 5% organic growth in the upcoming Q4’23 earnings report.

The ultimate Twilio product will utilize AI to help clients communicate with customers. In the future, software bots will communicate with the end customers eliminating the need for customer service reps.

The company launched CustomerAI back in last August. The announcement suggested the technology couples the powers of LLMs with the customer data from the Twilio platform.

While the technology promises a lot of benefits for customers with the ability to replace customer service reps with technology that can engage with customers and include predictive AI capabilities to enhance those encounters. The issue is how Twilio will actually benefit from this technology with an August still not flowing into financials similar to the issues facing other AI software companies where enterprises are looking more to save money with AI rather than spending more.

The co-founding CEO leaving the company at the time AI provides a major catalyst for the business is a mixed picture for the stock. COO Shipchandler was announced as the new CEO just in early January and the upcoming earnings report will be the first under his leadership.

Considering Twilio has trended in the wrong direction the last couple of years investors have to worry about a weak guidance around 2024 numbers. The company guided Q4 numbers above the prior range of revenues, though Twilio doesn’t provide any indication of how far results will top prior estimates for revenues of $1.03 to $1.04 billion.

Jeff Lawson probably wouldn’t be exiting the firm with strong results boosts from AI. A lengthy turnaround period would normally be the ideal time to change leadership and investors have to keep this consideration in mind.

Ho Hum

As with a lot of companies that saw communications demand pulled forward during Covid, the demand profile for Twilio hasn’t improved much since the peak. Analysts generally guide to revenue growth in the 7% to 10% range going forward.

The stock won’t gain much traction without a catalyst, such as AI. The stock currently trades at 30x EPS targets for 2024. Twilio only trades at 3x sales targets of $4.44 billion, but the company has low gross margins due to the communications costs.

Twilio has done an excellent job turning the business into a profitable enterprise with nearly $500 million in adjusted income targeted in 2023. One has to wonder if the company is spending aggressively enough on new growth opportunities, such as AI.

The company spent $242 million on R&D in the last quarter, but the amount was down substantially from the $285 million spent during the prior Q3. Once stripping out the stock-based compensation of over $90 million each quarter, Twilio is down to only $145 million in R&D expenses, or just 14% of revenues.

The CFO attended the UBS Global Technology conference following the Q3’23 earnings report and a lot of the conversation was on the new profit and cash flow profile of Twilio. Investors want to hear how AI will help drive sales growth back to the double digits and the level of investing needed to achieve those goals.

When asked about the CustomerAI product not until the very last question at the conference, the CFO gave a limited reply other than to suggest the product will turn into a meaningful revenue contributor. Aidan Viggiano suggested the industry hasn’t even figured out the commercial pricing and packaging structure.

In the mean time, dollar-based net expansion slipped to a very minimal 101% in the last quarter. In essence, current customers aren’t expanding services anymore with a large portion of the customer base likely spending less with Twilio.

The company has a net cash balance of $2.9 billion, so investing in profitable growth should be a goal. In addition, Twilio has already produced $192 million in free cash flow for the first 3 quarters of 2023.

All the company lacks is real growth and Twilio should lean back into growth with the AI catalyst.

Takeaway

The key investor takeaway is that Twilio has some interesting opportunities with mirroring AI with communications tools, but the company needs to actually provide some data points showing a market shift is benefiting the business. After the big rally and considering the CEO change, our view is to move to the sidelines heading into the Q4’23 earnings report in mid-February. The AI catalyst just appears to far away at this point and the first quarterly report by a new CEO tends to lead to conservative guidance.