Twilio trades at $118.45 and has moved in lockstep with the market. Its shares have returned 5.4% over the last six months while the S&P 500 has gained 5.4%.

Is now the time to buy Twilio, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Twilio Not Exciting?

We're sitting this one out for now. Here are three reasons why TWLO doesn't excite us and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Twilio’s billings came in at $1.17 billion in Q1, and over the last four quarters, its year-on-year growth averaged 9.4%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in acquiring/retaining customers.

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 7.2%, a deceleration versus This projection doesn't excite us and indicates 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 50.6% gross margin over the last year. That means Twilio paid its providers a lot of money ($49.43 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. That said, the stock currently trades at 3.9× forward price-to-sales (or $118.45 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Like More Than Twilio

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