Twilio Stock Is Tumbling 20%. Why an Earnings Beat Wasn’t Enough.

Investors appeared worried about the continued decline in the company’s profit margins. (Dreamstime)

Twilio stock was tumbling Friday even after the company beat quarterly earnings and revenue expectations. Investors may be spooked by potential pressures on Twilio’s profit margins.

The cloud-communications company posted adjusted earnings per share of $1.19 for the second quarter, surpassing analysts’ consensus call for $1.05, according to FactSet. Revenue totaled $1.23 billion, ahead of Wall Street’s estimate of $1.19 billion, and up 13% from the year prior.

Twilio shares were falling 20% to $97.98 Friday, bringing the stock into the red this year.

The company reported adjusted gross margin of 50.7% for the quarter, down from 51.3% in the first quarter and 53.3% the year before. That’s the fifth consecutive quarter adjusted gross margins declined.

“Persistent gross-margin pressure reasserted itself and is likely to drive negative gross-margin revisions near term,” analysts at Oppenheimer & Co. wrote in a research note Friday.

Management blamed foreign-exchange rates and increased carrier fees for the margin compression in a conference call Thursday, but added that the company was taking steps to arrest the trend. In particular, Twilio has announced price increases in its messaging and voice services, and is investing in platforms to deliver services more efficiently.

The changes may take a while to kick in, Oppenheimer argued, though the firm remains bullish on Twilio overall. Oppenheimer reiterated an Outperform rating on Twilio stock with a $135 price target.

The company’s guidance gave clues about its margin expectations in the coming quarters. Twilio boosted its 2025 forecast for organic revenue growth to a range from 9% to 10%, up from a previous range from 7.5% to 8.5%. However, the company didn’t raise its adjusted operating-income target, suggesting lower margins as it accelerates investments in research and development, noted Siti Panigrahi of Mizuho Securities.

“We view this as the right long-term move, though it’s likely contributing to post-market weakness,” Panigrahi wrote in a research note Friday.

On the bright side, Twilio hasn’t experienced any pushback against its price hikes, which underscores the pricing power of its offerings, Panigrahi argued.

Mizuho reiterated an Outperform rating on Twilio stock with a $140 price target.

Write to Nate Wolf at nate.wolf@barrons.com