Twilio has the potential to grow into a "much more profitable business," William Blair analysts said Friday as they reiterated an Outperform rating on shares of the cloud communications company.

Analysts led by Arjun Bhatia argued that Twilio's valuation was attractive, given the potential upside to revenue and free cash flow in coming years. Shares of Twilio spiked 22% to $138.50 on Friday.

The analysts said they "came away incrementally positive on the company's focus on innovation, its future growth drivers, and margin expansion potential," after attending Twilio's investor day on Thursday.

Twilio expects to see 11% revenue growth in the fourth quarter of 2024, with results set to be announced on Feb. 13. Third-quarter revenue was reported at $1.13 billion.

Management said they were "orienting the company to deliver double digit growth" and targeting at least $3 billion of cumulative free cash flow over the next three years.

In the analysts' view, Twilio's target of 21% to 22% operating margin by 2027, up from 16% in 2024, reflects an "encouraging pace of margin expansion." Moreover, the company's goal of double-digit revenue growth in percent terms is "very achievable," they added.

Twilio's foothold in the tech server sector has led to its adoption by artificial-intelligence companies looking to embed communications into their offerings, the analysts noted. During its investor day, the company claimed that 90% of the Forbes 50 AI startups were building on Twilio.

"This is promising, in our view, as some of these startups are likely to become much larger businesses in the future, which should drive natural growth for Twilio," the analysts wrote.

Baird analyst William Power upgraded shares of the tech company to Outperform from Neutral and raised his price target to $160 from $115.

The analyst cited a "reasonable" valuation and argued that the company's strengthening profitability, cash flow, and capital returns could continue to push the share price higher.

Power also pointed to Twilio's "AI potential," noting that AI-related companies spent $260 million on Twilio in the last 12 months.

"While we believe most of that is from legacy products, AI-driven products, including voice and messaging bots running on TWLO, could present a growing opportunity," Power wrote.