Twilio has been treading water for the past six months, recording a small return of 4.4% while holding steady at $104.50. The stock also fell short of the S&P 500’s 17.4% gain during that period.

Is now the time to buy Twilio, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Twilio Not Exciting?

We're cautious about Twilio. Here are three reasons there are better opportunities than TWLO and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Twilio grew its sales at a 11.6% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Twilio’s revenue to rise by 8.5%, a deceleration versus This projection doesn't excite us and implies its products and services will face some demand challenges.

3. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Twilio, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Twilio’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 50% gross margin over the last year. That means Twilio paid its providers a lot of money ($49.99 for every $100 in revenue) to run its business.

Final Judgment

Twilio isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 3.2× forward price-to-sales (or $104.50 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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