We recently compiled a list of the 12 Best Small Cap Tech Stocks to Buy. In this article, we are going to take a look at where Twilio Inc. (NYSE:TWLO) stands against the best small-cap tech stocks to buy.

US Inflation and the Anticipated Fed Cuts

Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.

Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.

AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.

Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.

Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.

Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.

Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.

He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.

Methodology

We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Twilio Inc. (NYSE:TWLO)

Market Capitalization as of September 11: $9.20 billion

Number of Hedge Fund Holders: 54

Twilio Inc. (NYSE:TWLO) is an American cloud communications company that provides programmable communication tools for making and receiving phone calls, sending and receiving text messages, and performing other audio/video communication functions using its web service APIs. It enables businesses to engage with their customers in a more personalized and effective way.

For the second quarter of 2024, the total revenues recorded by the company were $1.08 billion, up by 4% year-over-year. The earnings per share were $0.87. It reported more than 316,000 active customer accounts as of June 30, compared to over 304,000 active customer accounts at the same time last year.

There was an improvement in its customer spending, with its dollar-based net expansion rate coming at ~102% in Q2. This is due to the adoption of AI in the customer service space.  Moving forward, the company’s momentum is expected to be supported by strong partnerships with ISVs. It is also seeing increased demand for our international messaging services.

During Q2 2024, the count of hedge funds holding positions in Twilio Inc. (NYSE:TWLO) grew to 54 from 45 in the prior quarter. Now, the largest position is valued at $338,552,264 by Generation Investment Management.

A company report found that 84% of businesses think it provides good customer service, but only 54% of customers agree. This is because businesses need help understanding their customers’ data. By combining its communication tools, data, and AI, Twilio Inc. (NYSE:TWLO) can help businesses improve customer service.

Its stock has underperformed the market recently due to slower growth and weak customer spending, but new AI tools could help it improve customer service and grow its business. The overall revenue is expected to grow by nearly 20% over the next 5 years, paving the way for growth.

Aristotle Atlantic Focus Growth Strategy made the following comment about Twilio Inc. (NYSE:TWLO) in its Q4 2022 investor letter:

“We sold Twilio Inc. (NYSE:TWLO) and thereby reduced our subsector weight in software. The company reported a decent third quarter, but disappointed on fourth quarter 2022, full year 2023, and long-term guidance. The company is seeing macroeconomic headwinds and a slowdown spreading from technology, social media and cryptocurrency to retail and e-commerce. The other negative disclosure and a driver of this gross margin “miss” was that Twilio’s software sales are not accelerating at the rate that we expected. We are disappointed with this lower topline and low operating margin improvement guidance. The business transformation is taking longer than expected, and there is the heightened possibility that the new software growth could be stifled by more formidable competition as Twilio has made too many missteps.”

Overall TWLO ranks 3rd on our list of the best small-cap tech stocks to buy. While we acknowledge the potential of TWLO as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.