This Red-Hot Artificial Intelligence (AI) Stock Hits a Speed Bump. Here's Why You May Want to Buy It Hand Over Fist.

Twilio (NYSE: TWLO) stock registered stunning gains of 93% on the market in the past six months, driven by an acceleration in its growth on account of the improving demand for its artificial intelligence (AI) tools that enable its clients to communicate more efficiently with their customers.

However, Twilio's rally came to an abrupt halt following the release of its fourth-quarter 2024 results on Feb. 13. Shares of the cloud-communications platform-as-a-service (CPaaS) provider, whose application programming interfaces (APIs) allow its clients to integrate communications capabilities into their software applications, fell 15% following the release of its results.

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Let's see why that was the case.

Twilio's disappointing outlook sent the stock plunging

Twilio's better-than-expected results and guidance in recent quarters played a central role in its remarkable rally. Investors were anticipating another set of solid results from the company. The good part is that Twilio's 11% year-over-year revenue jump to $1.19 billion was slightly ahead of Wall Street's expectations. However, the 16% increase in its earnings per share to $1 was slightly below consensus estimates.

Twilio's outlook, however, was a disappointing one. Its top line is expected to fall just shy of consensus estimates of $1.14 billion at the midpoint. The bottom-line miss is going to be a bigger one as the company is forecasting earnings of $0.88 to $0.93 per share in the current quarter, versus the consensus estimate of $0.98 per share.

There were a couple of factors impacting Twilio's bottom-line performance of late. First, the company incurred higher hosting costs during the holiday shopping season last quarter, which impacted its non-GAAP gross margin by 10 basis points on a year-over-year basis. Second, Twilio incurred bad debt expenses to the tune of $17 million last quarter on account of slower payments by a Brazilian telecom customer.

The bad debt reduced Twilio's adjusted operating margin by 140 basis points last quarter. What's worth noting is that Twilio's earnings jumped an impressive 50% in 2024 despite these headwinds. Moreover, the midpoint of the earnings guidance for the current quarter points toward a year-over-year increase of 13%, which will be faster than the 7% to 8% organic growth it is expecting to deliver in Q1.

The faster earnings growth can be attributed to the higher spending by Twilio customers on its platform, as they are adopting more of its AI communication tools. The company claims that 90% of the top 50 AI start-ups listed by Forbes are already using its solutions to develop AI applications. More than 9,000 AI companies built solutions using Twilio's platform last year.

This explains why there has been a remarkable improvement in the demand for Twilio's communications tools, with the company signing 47% more deals worth more than $500,000 in Q4. This allowed Twilio to increase its dollar-based net expansion rate by four percentage points to 106% last quarter. The dollar-based net expansion rate compares the revenue from Twilio's active customers in a quarter to the revenue from those same customers in the year-ago period.

So, the growth in this metric suggests that more customers are adopting Twilio's solutions. This trend is likely to continue in the future as the spending on AI services in the communications industry is expected to hit $42 billion by 2027, according to Gartner. That's significantly higher than Twilio's 2024 revenue of $4.46 billion, suggesting that the company has a lot of room for growth in this space.

Even better, Twilio is positioned to make the most of this lucrative opportunity thanks to its massive customer base. The company's active customer base increased by 6.5% last quarter to 325,000. What this means is that there is a significant chunk of Twilio's customer base that's yet to adopt its AI-focused tools. So, there is still scope for an improvement in the company's dollar-based net expansion rate.

Why the stock's dip is a buying opportunity

Twilio's long-term market opportunity remains solid thanks to catalysts such as AI. More importantly, the company is confident of achieving its long-term targets despite the hiccups it experienced last quarter.

For instance, the company is anticipating its non-GAAP operating margin to jump by 500 to 600 basis points in 2027 as compared to 2024 levels. Not surprisingly, analysts are forecasting robust, double-digit earnings growth from Twilio for the next three years from last year's reading of $3.67 per share.

TWLO EPS Estimates for Current Fiscal Year data by YCharts.

Given that Twilio is trading at 29 times forward earnings after its latest drop, it is available at a discount to the tech-laden Nasdaq-100 index's earnings multiple of 34 (using the index as a proxy for tech stocks). So, investors are getting a good deal on this AI stock right now considering its healthy earnings growth potential, which is why it may be a good idea to buy it following its latest dip since it can regain its momentum once again.

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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 recommends Gartner. The Motley Fool has a disclosure policy.