The cloud computing company is expected to see improved growth due to increased adoption of AI.
The rise of artificial intelligence (AI) has given technology stocks a big boost over the past year. Nasdaq 100 Technology Sector During this period, the AI index exceeded $10 billion. However, not all companies in the sector are reaping the benefits of AI adoption.
Twilio (TWLO 1.74%) The cloud communications services provider's shares are down 11% over the past year, including the company's stock price, which is down 11%. The main reason for the company's weak share price is slowing growth due to weak customer spending.
However, Twilio's stock has recently started to gain momentum. But can this cloud stock keep rising? Let's find out.
Twilio could benefit from growing adoption of AI in contact centers
Twilio's application programming interfaces (APIs) allow businesses to build communication tools to reach customers through various channels, including text, email, voice, chat and video. The company's services enable customers to replace traditional contact centers, which require investments in real estate and equipment such as computers and servers, with cloud-based contact centers.
The good news is that the market for cloud-based contact centers is expected to generate $86 billion in revenue in 2029, compared to an estimated $26 billion this year, a compound annual growth rate of 27%. AI adoption in call centers is also expected to grow at a healthy 23% annual pace through 2030, generating $7 billion in revenue ten years from now, compared to $1.6 billion this year.
TWLO Revenue (Quarterly). Data from YCharts.
Twilio generated $4.2 billion in revenue over the past year, signaling that the rise of cloud contact centers and AI within them will be a boon for the company — and, more importantly, the company is already starting to roll out AI tools to its customers.
During a May earnings call, Twilio executives said they had made “progress across a number of AI products.” The company has already released Agent Copilot, the first of three AI-focused products it will incorporate into its communications solutions this year.
According to Twilio, Agent Copilot gives customer-facing agents deeper insight into customer behavior by analyzing real-time data, “reducing resolution times while automating and enhancing agent productivity.”
Beta testing with Twilio clients has shown that it can save time while addressing real customer needs.
Agent Copilot and Unified Profiles are currently in public beta and [online college] Universidad UK has already been leveraging these capabilities within their contact center, resulting in a 30% reduction in handle times and, by using our built-in AI automation tools, helping to deflect 70% of support cases in just two months.
More importantly, adoption of the company's Customer AI Platform, which began rolling out to customers in Q3 2023, is also improving. As such, Twilio should be able to capture a larger share of customer spending in the future as it launches more AI-focused products.
There is a potential upside
Revenue grew 7% year over year on an organic basis in the first quarter of 2024, while total revenue increased 4% to $1.05 billion. The company ended the quarter with 313,000 active customer accounts, up from 300,000 in the same period last year.
But the dollar-based net retention rate was 102%, which is not good. This metric compares Twilio's customers' spending during the quarter to the same customers' spending in the same quarter a year ago. A number above 100% means that customers have further adopted the company's services or extended their use of their current services. Thus, Q1 net retention indicates little improvement in spending among existing customers.
For the full year, management expects organic revenue to grow 5% to 10%, and analysts expect total sales to grow 4.6% to $4.35 billion in 2024. But as adoption of Twilio's AI-centric services increases, revenue growth is also expected to improve, as shown in the following chart.
TWLO's revenue forecast for the current fiscal year. Data from YCharts.
We can also see from the chart that analysts have recently increased their revenue estimates for 2026. And revenue is predicted to grow at around 20% per year over the next five years.
This potential improvement in Twilio's growth is exactly why investors should consider buying this cloud stock: Currently, the company's shares trade at just 2.6 times sales, a discount to the U.S. tech sector average of 8.4 times.
The company's shares are also trading at 21 times forward earnings, a significant discount to the Nasdaq-100 Index's 30 times forward earnings (which we use as a proxy for tech stocks). Twilio's median 12-month price target is $69, which would represent a 16% upside from current levels, according to the 34 analysts covering the stock. The highest 12-month Street price target is $110, suggesting 85% upside potential.
If Twilio's growth really starts to improve thanks to AI, there's a good chance it can overcome its underperformance and turn a healthy profit, and investors might want to consider buying the stock while it's still cheap.
