Shares of cloud communications specialist Twilio(NYSE: TWLO) may have underperformed the broader market this year with a decline of 10%, but they have found some momentum of late and have jumped more than 20% in the past three months.
What's more, Twilio stock got a nice shot in the arm on Oct. 2, rising over 4% in a single session after the company revealed that it is going to integrate OpenAI's Realtime API (application programming interface) into its platform.
Let's see why investors cheered this news and check if Twilio's recent moves to integrate artificial intelligence (AI) into its cloud-based communications platform would be good enough to help it grow at a faster pace in the future.
AI could move the needle in a big way for Twilio
Twilio believes that the integration of Realtime API into its cloud communications platform would allow its 300,000-plus strong customer base "to build powerful conversational AI virtual agents leveraging OpenAI's flagship multilingual and multimodal GPT-4o model." It is worth noting that Realtime API supports speech-to-speech technology, which allows developers to make conversational AI assistants that sound more human.
Management points out that conversational AI assistants capable of human-like dialogue could help customer service agents deliver better satisfaction levels and experience. Additionally, the company believes that customers looking to build conversational AI assistants will be able to build, deploy, and connect with their customers using virtual agents on a single platform instead of turning to multiple vendors.
As a result, Twilio says that customers using its platform to make virtual agents using OpenAI's Realtime API would be able to reduce operational costs while driving an improvement in efficiency. Insight Partners estimates that the size of the conversational AI market was worth an estimated $8.4 billion last year, but it could jump to almost $40 billion in 2031.
So, Twilio is doing the right thing by partnering with OpenAI to tap this lucrative opportunity as it will now be able to offer customers an additional product that could help it win a bigger share of their wallets, while also helping it attract new customers. Twilio ended the second quarter of 2024 with over 316,000 active customer accounts, an improvement from the 304,000 active customer accounts in the same period last year.
Its dollar-based net retention rate in Q2 was 102%. This metric refers to the amount of money spent by the company's customers on its offerings during a quarter, which is then compared to the money those same customers spent in the year-ago period. A figure of more than 100% means that those existing customers continue to buy more of Twilio's offerings. However, Twilio's dollar-based net retention rate was barely above the 100% mark, which means that the company needs to find more ways for its customers to spend more money on its services.
This is where AI could come in handy and is probably the reason Twilio stock jumped on the OpenAI integration news.
Stronger financial performance could be on the way
Twilio's revenue in the second quarter was up just 4% year over year to $1.08 billion. Analysts are expecting the company to finish the year with a 5% increase in its top line to $4.37 billion, which is almost in line with management's guidance. The good part is that consensus estimates project a slight improvement in its revenue growth next year to 7%.
The addition of AI-related features could eventually help Twilio sustain a healthier level of growth in the future while powering stronger growth in the company's earnings, because it will be in a position to win new customers and also drive higher spending from the existing ones. Analysts are expecting Twilio's earnings to grow at an annual pace of nearly 20% for the next five years, and the points discussed in this article indicate that it could indeed deliver such healthy growth thanks to a new catalyst in the form of AI.
Given that this tech stock is now trading at 17 times forward earnings, investors are getting a good deal on Twilio right now as it is significantly cheaper than the U.S. tech sector's average earnings multiple of 45. Savvy investors looking to add a company that's attractively valued and capable of delivering healthy earnings growth in the future should consider utilizing this buying opportunity before Twilio flies higher.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Twilio. The Motley Fool has a disclosure policy.
