Twilio tumbles on margins, but analysts say buy the dip

Twilio (NYSE:TWLO) tumbled 15% during Friday morning market action, following second quarter financial results and an outlook that mostly topped estimates.

The stock appears to be dropping on weaker-than-expected margins, but analysts find the reaction overblown.

“Q2 results showed top-line strength and demand drivers like Messaging and Voice AI remaining well intact, but the combination of lower GPM (gross profit margin) due to new A2P fees and increasing Messaging (i.e. international) mix, lack of EBIT guide raise given ongoing investments, coming stop of business-unit disclosures, minimal near-term anticipated impact from pricing given the deployment (which is better frankly for long-term), and 2H FCF reduction, has sent shares lower AH,” said Piper Sandler analysts James Fish and Caden Dahl, in an investor note.

Piper Sandler reiterated its Overweight rating and increased its price target to $144 from $140 following the results.

KeyBanc Capital Markets reiterated its Overweight rating and $146 price target. KeyBanc noted that Twilio’s gross margin profile was affected by several factors.

“For starters, the return of the A2P pricing increases from Verizon muddies both the revenue numbers and gross margin (since the pass-through margin is 0%),” said KeyBanc analyst Jackson Ader and Jack Nichols, in a note. “We understand this is dilutive to the gross margin line, but it can be fairly easily sized and adjusted for.”

“There was also the pricing increase on U.S. messaging list price that goes into effect immediately for the self-serve channel and over time in the enterprise accounts, which will adjust upon their renewal in the next several years,” Ader added. “This would have contributed to the increase in organic guidance but not so much that we’d view the raise as cheapened in any way.”