However, this may present an opportunity for savvy investors to buy two fast-growing companies at relatively cheap valuations before they break out. Let’s look at the reasons why the fortunes of Chewy and Twilio could turn around and help these two growth stocks become unstoppable.
Chewy’s stock price slump is a tad surprising given that it is an online retailer of pet food and supplies, a market that’s growing at a fast clip since the novel coronavirus pandemic. Chewy has sustained its momentum even after the height of the pandemic, which is evident from its fiscal 2021 second-quarter results, which were released on Sept 1, 2021.
The company’s revenue increased nearly 27% year over year to $2.16 billion thanks to a bigger customer base and higher spending. Chewy had 20.1 million active customers at the end of the quarter, a jump of 21.1% over the prior-year period. Meanwhile, the company’s net sales per active customer increased 13.5% year over year to $404, which was the first time in the company’s history that the metric crossed the $400 mark.
This combination of an increase in Chewy’s customer base and a bump in spending by its active customers isn’t surprising, as more people are purchasing pet food and supplies online in the U.S. Market research firm Packaged Facts estimates that 30% of pet products sales are taking place online in 2021, compared to just 8% in 2015. The pandemic has accelerated the adoption of online shopping for pet products and supplies, which is why Packaged Facts anticipates that e-commerce could account for 53% of the overall pet products retail space by 2025.
That would translate into a healthy addressable opportunity for Chewy, as the overall pet retail market in the U.S. is expected to hit nearly $95 billion in revenue by 2025. More importantly, Chewy is one of the key players in this space. A survey by Packaged Facts points out that 41% of customers surveyed who buy their products online do so from Chewy.
As such, Chewy can continue to enjoy secular growth thanks to its strong position in a fast-growing industry. Additionally, it is worth noting that the strong customer base that Chewy has built so far will power its growth in the long run through higher spending. That’s because the company’s customers increase their spending on its offerings over time. Chewy management pointed out in a shareholder letter earlier this year that “customers historically spend over $400 with us in their second year, compared to approximately $700 in their fifth year and almost $900 in their ninth year.”
All of this explains why Chewy is expected to clock impressive top- and bottom-line growth in the coming years.
So investors looking to buy a potential growth stock on the cheap right now should look closely at Chewy. The stock is trading at 3.34 times sales, which puts it at a discount to last year’s price-to-sales ratio of 5.62 and almost at par with the S&P 500‘s sales multiple of 3.2 — and it may not be available at these multiples once the stock starts soaring.
Twilio stock has been battered this year thanks to management’s habit of delivering conservative guidance and then crushing Wall Street’s expectations with solid sets of results. Smart investors, however, would do well to look beyond analysts’ near-term expectations from Twilio and instead focus on the massive opportunity the company is sitting on.
Twilio operates in the cloud-based contact center market, which is expected to clock a compound annual growth rate of nearly 26% through 2026, according to a third-party estimate. That’s not surprising, as more organizations are moving from physical contact centers to cloud-based ones thanks to the many advantages of the latter, including lower operating costs, quick setup time, higher productivity, and lower setup costs.
Twilio is one of the best ways to play this transition toward cloud-based contact centers and the increasing adoption of the communications platform-as-a-service (CPaaS) model, as it controls 38% of this market as per a third-party estimate. This bodes well for Twilio’s future, as the global CPaaS market is expected to clock 34% annual growth through 2026 and generate $26 billion in revenue.
This indicates that Twilio has a lot of room to keep growing at a terrific pace in the long run given that it has generated $2.55 billion in revenue over the trailing twelve months. Twilio is making the most of the end-market opportunity, as its revenue for the third quarter of 2021 increased 65% year over year to $740 million.
This terrific revenue growth was driven by a mix of acquisitions, a higher customer count, and increased spending by the company’s existing customer base. Twilio had 250,000 active customers at the end of the third quarter, up from 208,000 in the prior-year period. The company’s dollar-based net expansion rate was 131% during the quarter.
The dollar-based net expansion rate compares the spending by Twilio’s active customer base in a quarter to the spending by the same cohort of customers in the year-ago period. So the higher this figure is over 100%, the better it is for Twilio, as it indicates higher spending by its customer base as they adopt more of its solutions or increase the usage of its offerings.
Moreover, don’t be surprised to see Twilio’s dollar-based net expansion rate head higher thanks to cross-selling opportunities arising out of its Zipwhip and Segment acquisitions, which have extended the company’s addressable opportunity into fast-growing areas. As a result, it is not surprising to see that Twilio’s top line is expected to keep moving higher in the coming years.
So Twilio stock’s pullback in 2021 gives investors the opportunity to buy this high-growth cloud company that seems built for long-term growth at 18 times sales, which is much lower than its 2020 price-to-sales ratio of 31.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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