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Why Twilio Stock Fell 20% in June

What happened

Shares of cloud communications giant Twilio (NYSE: TWLO) fell 20.3% in June 2022, according to data from S&P Global Market Intelligence. High-growth but richly valued tech stocks, especially those like Twilio that currently generate little to no profit at the moment, have fallen out of favor among investors. As of this writing, Twilio stock is down 68% so far in 2022. By comparison, the S&P 500 and Nasdaq Composite indexes are down a respective 20% and 29%.

So what

The first half of 2022 had the worst start to a year since 1970, but the broad-market indexes only reveal part of the pain many investors are experiencing right now. Twilio is a perfect case in point. The business itself is performing quite well. Organizations around the globe are adopting new cloud-based communications (voice, chat, email, and video, all delivered via an internet connection) to meet modern employee and customer needs. Twilio reported year-over-year revenue growth of 48% (or organic growth excluding acquisitions of 35%) in the first quarter of 2022.

So what's eating Twilio stock? The U.S. Federal Reserve is aggressively hiking interest rates to try and combat inflating commodity prices. It increased its short-term benchmark rate by 0.75% in June, and it's widely anticipated it will hike again in July and September.

Rising interest rates lower the present value of risk assets like stocks. Twilio doesn't anticipate it will generate a profit until 2023, so shares are particularly vulnerable to the Fed's action plan.

Now what

The upshot here is that Twilio's co-founder and CẸO, Jeff Lawson, thinks organic growth will continue at a 30% or greater pace for the foreseeable future. Business tools are going the way of the cloud, and this migration will continue apace for the balance of the 2020s, according to many estimates.

Though Twilio's lack of profits at the moment have the stock out of favor, this business is a best-in-class cloud software company with tons of net cash and short-term investments (over $4.2 billion as of March 2022) with tremendous potential. The stock now trades for just four times current-year expected sales.

Of course, that doesn't mean Twilio won't continue to be highly volatile given mounting economic uncertainties. But if you're a long-term investor (with at least a few years before you need the money, but the more the better), this stock looks incredibly cheap given the business's opportunity over the next decade.

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Nicholas Rossolillo and his clients have positions in Twilio. The Motley Fool has positions in and recommends Twilio. The Motley Fool has a disclosure policy.


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