Two-and-a-half months ago in this space, I wrote about why Twilio stock still had plenty of upside even after it had doubled from its June IPO. For about a month, I was spot on: TWLO stock rose from $53 to $68 in September. At that point, the stock was up more than 300% in the three months since its late-June market debut.
What happened next? The bottom fell out. Twilio Inc (NYSE:TWLO) stock plunged 55% in October and the first week of November, bottoming out at $30 on Nov. 7.
Most young stocks tend to have a post-IPO comeuppance in their first year, but Twilio’s was particularly unforgiving.
Twilio Stock Story Hasn’t Changed
But here’s the thing: now that the weak hands have been shaken out of Twilio stock, I’m more bullish on it than I was before.
In fact, TWLO is already trending in the right direction, jumping from $31 to $37 in the first three trading days of the week. Part of that bounce back is simply a correction in the other direction after the stock had become oversold. But the main reason is that Twilio’s story hadn’t changed.
Sales of its cloud communication products — which allow customers to send and receive voice and text messages via the cloud — are still skyrocketing. Revenues improved 62% in the third quarter, and are expected to grow by that amount for the year. The number of active customer accounts ballooned 45%.
It still has a revolutionary product with a star-studded client base, featuring the likes of Facebook Inc (NASDAQ:FB) WhatsApp, Airbnb, Home Depot Inc (NYSE:HD), salesforce.com, inc. (NASDAQ:CRM) and Uber among its top customers. It still has a usage-based pricing model that enables the company to make money on every message sent, every phone call made and every authentication processed by its clients.
And now, it’s not as overcooked as it was two months ago, with a price-sales ratio (13) that’s fairly reasonable for a tech company with revenue growth of better than 60%. But here’s what I like most about Twilio: it’s the clear leader in a niche market, and that market is growing exponentially in importance. It’s expensive and time consuming for companies like Uber and Airbnb to create their own SMS and call integration platforms — which is why those companies have turned to Twilio to do it for them.
TWLO also has plenty of new offerings: the Twilio Enterprise Plan, which caters to larger, more complex businesses; Voice Insights, which allows customers to monitor and assess the quality of live calls; and HelloVote, a chat bot that allows you to register to vote in 60 seconds online through SMS or Facebook Messenger. Those products should help the company diversify, thus providing future revenue streams.
The problems with Twilio are the same as they were in late August: it’s not yet profitable, and not many people understand what they do. Well, losses narrowed last quarter, coming in at 13 cents per share, down considerably from its 70 cents EPS loss a year ago.
And the lack of understanding about “cloud communications” I actually see as a positive. The more people come to know the company and what it does, the more likely they’ll be to buy Twilio stock. I thought there were more buyers than sellers still out there, even prior to its mass October selloff. Now I’m sure of it.
TWLO Now at a Discount
Look, anytime you see a stock plummet the way TWLO did, it gives you pause. And even after a couple of nice up-days, TWLO stock is still well below its 50-day moving average ($48). What you can do is start with a small position if the stock can sustain this mini-rally for at least a few more trading days and add to it if it pokes its head back above that 50-day line.
What I do know is that Twilio stock will be back. There’s too much sales growth and market opportunity for it not to be, and there was no obvious reason why the stock nose-dived aside from a high valuation, a post-IPO correction and a lack of profits, which is common with most young tech companies.
Bottom line: If you like Twilio stock long term, you won’t get a much better entry point than right now.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
