A couple of weeks ago, I warned that that shares of cloud communications platform company Twilio Inc (NYSE:TWLO), which had risen to all-time highs and up almost 140% year-to-date, had become overbought. On Thursday, Twilio stock ended the day 7% lower after the company issued preliminary third quarter results that didn’t impress Wall Street, despite the strong year-over-year growth numbers on both the top and bottom lines.
In its first reporting period since its IPO in June, TWLO expects total revenue of $70.25 million to $71.25 million in the three months ended Sept. 30.
This compares to revenue of $44.3 million in the year-earlier period. That means, even on the low-end, revenue will grow at almost 60%. Twilio expects an adjusted loss of 4 to 5 cents per share, versus a 7-cent loss a year ago. That, too, is an impressive improvement from a year ago.
In both measures, Twilio exceeded analysts’ forecast for a net loss of 8 cents per share on revenue of $65.2 million. All told, TWLO has done a solid job growing its consumer base, which now consists of 30,000-plus customers with average spending habits that exceed $7,000 annually. These customers value Twilio’s easy-to-use platform, which encompasses voice, messaging, video and authentication services.
What’s Ahead for Twilio Stock?
But for Twilio stock to match its operational performance in the years ahead, it needs to ramp up its investments in its platform, which is going to cost tons money. TWLO operates in a market where deep-pocketed companies like of Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN) can easily enter. This explains why Twilio announced an additional $400 million stock offering, which sent TWLO stock plunging 14% on Oct 10.
The company intends to sell $50 million worth of Twilio stock initially. Another $350 million worth of TWLO stock will then be sold by other selling stockholders, totaling $400 million. While the company can benefit from the proceeds of the sale, which it can use to grow its business, investors hate the dilutive impact the sale will have on Twilio stock.
TWLO closed Thursday at $47.24, down 7%. As it stands, Twilio stock has been punished, plunging more than 22% in the past five days, while falling more than 12% over the last month. And if you’re keeping score at home, Twilio stock has lost 30% of its value since I told you to take profits on Sept. 28.
While retail investors were aggressively buying TWLO, Wall Street and smart money took a wait-and-see attitude, given that Twilio stock — at the time — had outperformed analysts’ consensus price target of $40 by about 75%. In that regard, based on Thursday’s closing price of $47.24, TWLO is still 21% above its consensus price target.
What do the analysts know that retail investors are ignoring? It’s simple: Given that Twilio is still only three months old as a public issue after its June IPO, analysts want a longer track record for assessing managerial execution. And with TWLO not expected to be profitable until 2018, a $40 price target seems adequate and investors should prepare for additional declines.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
