This AI software stock with an attractive valuation could become a multibagger thanks to its healthy position in a rapidly growing end market.
Palantir Technologies (PLTR 2.81%) is probably one of the first names that come to mind when investors look for a company that is capitalizing on the proliferation of artificial intelligence (AI). The company’s expertise in the generative AI software market is one of the main reasons why this is likely the case. After all, Palantir’s Artificial Intelligence Platform (AIP) has seen huge success with customers looking to integrate generative AI technology into their operations, helping them realize significant productivity gains.
Unsurprisingly, Palantir’s growth has accelerated remarkably this year, driving its stock price up 156%. However, concerns over Palantir’s high valuation have weighed on the stock lately. This is evident from the 6% rise in its stock price over the past three months, despite the company posting strong results last month.
However, the actions of Twilio (TWLO +0.11%) have increased over the past three months. The stock has appreciated an impressive 36% during this period, far outpacing Palantir’s gains. Let’s take a look at why this was the case and why it might make sense to buy this stock immediately.
Image source: Getty Images.
AI boosts Twilio’s growth
Twilio is a cloud communications specialist that offers application programming interfaces (APIs), allowing its customers to communicate with their customers through various channels, including text, email, voice, chat and others. The company’s solutions have helped replace traditional contact centers. Its customers simply need the Internet and a computer or smartphone to connect with their customers, rather than setting up physical contact centers that are more costly to establish and maintain.
Today’s change
(0.11%) $0.15
Current price
$140.46
Key Data Points
Market capitalization
$21 billion
Daily scope
$139.70 -$140.88
52 week range
$77.51 -$151.95
Volume
634 KB
Average flight
2.3 million
Gross margin
48.41%
Besides APIs, Twilio’s cloud platform also offers its customers AI-driven insights. For example, Twilio customers can improve engagement and drive stronger sales using predictive analytics and AI-driven recommendations. The company enables its clients to create custom extended language models (LLMs) based on customer data to better understand customer habits and deploy marketing campaigns accordingly.
Importantly, Twilio’s customer base is growing at a faster rate thanks to the adoption of its AI offerings. The company’s active customer accounts increased 22% year over year in the third quarter to 392,000. That’s much better than the 4% increase in its active customer accounts during the same quarter last year.
An improvement in spending from existing customers also accompanies this healthy increase in Twilio’s active customer base. The company reported a 4 percentage point increase in its net dollar expansion rate in the third quarter, to 109%. This metric compares Twilio customer spending at the end of a quarter to spending by that same cohort of customers over the previous year. A score above 100% means existing customers purchased more of Twilio’s offerings, and the silver lining is that this metric has been growing at a healthy rate.
Twilio believes it can continue to capture a greater share of its customers’ wallets through the cross-selling opportunities created by its AI products. Management noted during the October earnings call that the number of customers using multiple products exceeded 20% thanks to the growing adoption of its agentic AI and conversational AI solutions. So, Twilio still has plenty of room to increase cross-selling, which should help the company post robust earnings growth.
It reported a 22.5% year-over-year increase in third-quarter profit, to $1.25 per share, on a 15% year-over-year rise in revenue. Investors would do well to note that Twilio’s growth trajectory has improved in recent quarters.
TWLO revenue (quarterly) data by Y Charts.
The stock can prove to be a winner in the long term
The communications platform-as-a-service (CPaaS) market, powered by Twilio, is expected to grow at an annual rate of 19% through 2034, according to Precedence Research. Market revenue is expected to grow from $23 billion in 2025 to $108 billion in 2034, with AI playing a significant role in this growth.
Twilio is on track to finish 2025 with just over $5 billion in revenue, indicating it has a nearly 22% share in this space. This share may improve in the future as AI drives greater customer adoption of Twilio’s solutions. Even if Twilio manages to increase its market share to 25% by 2034, its revenue could reach $27 billion by the end of the forecast period.
Twilio currently trades at an attractive 4.5x sales, well below Palantir’s 126x sales multiple. Assuming Twilio trades at even 5.5x sales in 2034 (as per Nasdaq Composite multiple of the index’s sales), its market capitalization could rise to $148 billion. Twilio currently has a market cap of $22 billion, indicating that this stock has the potential to become a long-term multibagger pick.
