It has been a wild ride for investors in Twilio Inc (NYSE:TWLO). From its debut around $25 per share, TWLO stock shot to the heavens. Just three months later, Twilio stock reached $70, a near-triple. For anyone lucky enough to get an allocation at the IPO price of $15, it was more than a quadruple.
But for stockowners that held on, that joy has turned to bitterness as TWLO stock has tanked. Shares are off more than 50% from the recent highs as a badly timed secondary stock offering sunk the stock.
And with momentum gone in the recent IPO space as other hot names such as Acacia Communications Inc (NASDAQ:ACIA), Coupa Software Inc (NASDAQ:COUP) and Nutanix Inc (NASDAQ:NTNX) have all fizzled out.
Even despite positive earnings Friday, Twilio stock continues to decline despite the rest of the market surging. Can TWLO recover, or will the stock slide below its IPO price?
TWLO Stock Pros
Good Quarterly Results: Twilio put up strong results in its earnings release Friday. The company only lost 4 cents a share, analysts had expected a loss twice that large. And revenues of $72 million topped expectations by almost $5 million. That’s a big beat.
With these better-than-expected results, Twilio put up more than 60% revenue growth versus the same quarter last year. And unlike many of the tech unicorns, TWLO has achieved that growth without suffering large losses. Without a need for constant inflows of new cash, Twilio should be able to avoid heavy equity dilution while the business grows. That’s a great feature for a young growth stock.
Improving Customer Base: In the past, a key concern with TWLO stock was its heavy reliance on Facebook Inc‘s (NASDAQ:FB) WhatsApp for business. Prior to Twilio’s IPO, WhatsApp represented 17% of Twilio’s revenues. Many people viewed this as a serious risk to TWLO’s business, as WhatsApp doesn’t necessarily have a proven business model or a stable user base.
However, according to Twilio’s most recent conference call, WhatsApp now represents just 7% of revenues. That’s a much more manageable risk. Furthermore, TWLO reports that it now has 34,000 different active customer accounts, way up from the 24,000 reported previously. Twilio has greatly reduced its concentrated customers risk.
Short Squeeze Potential: Short sellers have hounded TWLO stock ever since the IPO. As of the latest data, an astounding 64% of Twilio’s free-floating shares have been sold short. For U.S. companies with a market cap of $1 billion or more, TWLO is the fourth-most shorted firm as a percentage of float.
Speculators short selling Twilio stock have made a fortune over the past month. But they risk overstaying their welcome. When more than half a company’s float is short, it represents a tremendous amount of potential buying interest that will come into play once TWLO reports positive news. In the longer-run, high short interest often signals real trouble at a company. However, in the near-term, high short interest often leads to large rebounds in stock prices.
TWLO Stock Cons
Somewhat Expensive: Even after getting cut in half, TWLO stock still seems fairly pricey. On a trailing basis, it is selling at almost 20x sales. Even with next year’s vigorous expected growth rate, it would still be selling around 10x sales.
While none of Twilio’s most direct competitors are publicly listed, other peers in the online advertising space all sell under 10x sales. Twilio has an impressive growth rate, but that growth must continue for a couple of years in order for the firm to grow into its already large valuation.
More Shares to Hit the Market: TWLO stock is facing a big overhang come December. Much of Twilio’s initial run occurred because the company sold a very small portion of itself to the public in the first offering. On IPO day, Twilio sold less than 14% of its stock to the public. That left 86% locked up, unavailable for trading.
Stock prices, like many things, are subject to supply and demand. As a fast-growing company, many investors wanted TWLO stock, but only a limited quantity of stock was available to buy. This arguably caused Twilio stock to hit a price far above its true value. Once the company announced an initial secondary offering for a relatively small number of additional shares, TWLO stock started to dive.
And that was just the opening event. On Dec. 20, much of the currently non-traded TWLO stock will exit lockup. This will allow holders to sell Twilio stock on the open market. And with the vast majority of the company’s stock not being traded publicly, there is a potential deluge of new stock set to hit the market just six weeks from now. It’s unlikely that large investors will take positions in TWLO prior to the lockup date.
Fast-Changing Business: It’s hard to judge how much of a moat Twilio’s business comes with. The company has many competitors that replicate much of its product offerings, often at significantly cheaper rates. TWLO appears to have a technological lead in some areas, particularly in messaging via text message, but who knows how valuable that will be years from now. I remember when banner ad companies were still hot stocks.
Also, as a middleman, there is the potential for customers to build their own solutions in house. Obviously for most of the company’s 34,000 clients, building an in-house alternative wouldn’t be worth the hassle; however the company’s larger customers could eventually leave if they wanted to save money. Investors in these sorts of online adtech plays have generally seen fairly poor results over the years.
Bottom Line on Twilio Stock
I don’t see a compelling reason to move into TWLO stock ahead of the Dec. 20 lockup date. Yes, the share price has fallen sharply over the past month. But the share price declined due to its previous overvaluation. And although Twilio has announced positive earnings results since going public, even at today’s stock price, the company needs to deliver more growth to justify its market cap.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
