Twilio (Second -1.37%) And Unit (U -2.65%) both hit all-time highs during the growth and meme stock buying spree in 2021. Twilio stock rose to $443.49 in February, up 2,857% from its initial public offering (IPO) price of $15 in 2016. Unity stock hit $201.12 in November of this year, up 287% from its IPO price of $52 in 2020.

Yet today, Twilio and Unity trade for about $60 and $15, respectively. Both stocks plunged as their growth cooled and rising interest rates burst their inflated valuations. So should contrarian investors still buy one of these fallen stocks?

Image source: Getty Images.

What happened to Twilio?

Twilio’s cloud-based platform handles text messaging, voice calls, video, and other features for mobile apps. Instead of building these tools from scratch—which can be buggy, time-consuming, and difficult to scale—developers can simply add a few lines of code to their apps and outsource these features to Twilio.

Twilio then charges these customers usage-based fees when they access the platform. The technology works in the background. At Twilio, for example, Airbnb Guests can contact their hosts; Lyft Passengers can send messages to their drivers and other companies can send text-based confirmation messages for their mobile apps.

Twilio initially benefited from the rapid growth of the mobile app market. From 2016 to 2022, revenue grew at a robust compound annual growth rate (CAGR) of 55%. This growth was driven by both organic expansion and acquisitions of smaller companies.

Yet in 2023, Twilio’s revenue grew just 9%. Growth slowed as the app market matured and macroeconomic headwinds forced many of its customers to rein in spending. Twilio also struggled to increase its gross margins as wireless carriers charged third-party apps higher fees for access to their networks. The company also remains deeply unprofitable under generally accepted accounting principles (GAAP).

Twilio came under siege from activist investors as the company’s growth engine stalled and founder and CEO Jeff Lawson stepped down in early 2024. Analysts expect the company’s revenue to grow at an average annual rate of just 7% from 2023 to 2026. The stock looks cheap at two times this year’s revenue, but it may be difficult for the company to command a higher valuation in this volatile market.

What happened to Unity?

Unity’s freemium game engine bundles tools for creating graphics, sound effects, multiplayer features, and other assets for video game developers. It also provides tools for monetizing games with in-app purchases and integrated ads.

This complete solution makes Unity a popular development platform for both smaller developers and larger studios. At the time of its IPO, more than half of all mobile, console and PC games worldwide were developed using its tools.

Unity’s revenue grew 43% in 2020 and 44% in 2021. However, in 2022, revenue grew only 25% as the company faced two major headwinds. First: Apple‘S (AAPL 0.20%) Privacy changes in iOS made third-party advertising algorithms obsolete. Second, the gaming market slowed after its temporary growth spurt during the pandemic faded.

To reboot its advertising business, Unity merged with ad tech company ironSource in late 2022. That merger boosted reported revenue by 57% in 2023, but analysts expect a 20% decline in 2024 after the company fully wipes out those inorganic gains and divests some of its lower-margin, non-core businesses. Unity’s CEO John Riccitiello also abruptly resigned last October following attempts to introduce new “runtime fees” (which would be charged every time A game was installed after a developer had exceeded certain sales thresholds) triggered strong backlash and calls for a boycott among the developers.

Analysts expect Unity’s revenue to actually decline by an average annual revenue decline of Negative 1% between 2023 and 2026 as it tries to right-size its business. The company is also expected to remain unprofitable on a GAAP basis for the foreseeable future. That’s a bleak outlook, but its stock still appears historically cheap at about four times this year’s sales.

The better buy: Twilio

I wouldn’t rush to buy Twilio or Unity right now. Both companies face major macroeconomic and competitive challenges and are unlikely to generate much interest until they restart their growth engines or become profitable.

But if I had to choose, I’d buy Twilio because it’s still growing, cheaper, and has fewer existential challenges to deal with. Unity’s merger with ironSource obviously didn’t solve the problems, and I’d stay away until revenue growth stabilizes.