Twilio Inc (NYSE:TWLO) has plans to have a secondary offering, and TWLO stock is tumbling as a result.
Perhaps it’s time to take some profits on what looks to be an overheated name?
Twilio stock isn’t falling only because a secondary offering dilutes current users stakes in Twilio, a company that that provides a cloud-based communications platform for services like Uber and Facebook Inc’s (NASDAQ:FB) WhatsApp. It’s also because the stock has had such a monster run since it went public in late June.
In a year where initial public offering success has been hard to come by, TWLO really stands out. This is a stock that’s still trading at around $53 after going public at $15. Off the first day of trading at the market close, Twilio stock is up an extraordinary 86%.
“The higher they fly, the farther they have to fall” is actually a pretty apt cliche here. It doesn’t take much to prod investors into making a stock a source of profits after such a run. Note that TWLO made a record close in late September, and it’s been in a selloff ever since.
That’s not to say that there’s something wrong with Twilio’s fundamental business. In fact, no one should say that — it’s simply not true.
Analysts expect TWLO to generate a long-term growth rate of nearly 40% per year over the next half decade. That kind of projection is always going to get a huge premium for the market.
It’s just that any stock can be overpriced.
Twilio Stock Steps on a Trip Wire
It’s not apparent with TWLO at first glance. The forward price-to-earnings ratio of about 30 is actually below the company’s projected long-term growth rate. But that goes out the window when a company plans to bring in a lot of new equity holders.
Anyone who got in at the closing price should be taking at least some chips off the table. After a 260% gain for Twilio stock off the IPO price, it makes sense to reap some rewards. Don’t forget: We’re getting close to window-dressing season. Fund managers looking to pretty up their results before the end of the year might want to book such a beautiful run while they still can.
Also don’t forget: A secondary offering means there will be many more investors with a claim on the company’s profits. Earnings per share have to go down. It’s simple arithmetic. Existing shareholders will soon have to share that enviable growth rate with a horde of new owners. Twilio said in a regulatory filing:
“We currently intend to offer approximately $50 million of shares of Class A common stock and the remainder will be offered by the selling stockholders. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.”
True, the drop off in Twilio stock might seem excessive given that we’re talking about a $50 million sale on a market cap of $12 billion. However, there’s more going on here.
As we’ve seen many times before, when a stock rockets up as fast as TWLO has, it’s almost spring-loaded for a drawdown. TWLO will be a buy again but it needs to cool off a little bit first.
As of this writing, Dan Burrows didn’t hold a position in any of the aforementioned securities.
