Any time a stock goes ballistic off of its initial public offering like Twilio Inc (NYSE:TWLO) did, investors need to worry about getting burnt. Such moves are driven more by hope and hype than fundamentals. But that doesn’t mean there’s something wrong with the underlying business. It just means the market got a little overexcited about the growth prospects for TWLO stock.
When a valuation gets stretched to the extent Twilio stock did, it almost acts as a tripwire. The slightest hint of bad news or negative commentary can unleash a selloff.
That’s largely what we have going on with TWLO. Shares immediately gained 90% from its IPO price and hardly looked back. By its peak, shares had more than quadrupled. It took all of three months.
Part of the reason for the over exuberance is probably due to the fact that it was skimpy year for IPOs in general — especially tech IPOs that worked out. In that sense, TWLO stole the show by being the only name in town.
Investors looking to put capital to work in new technology companies in the equities market or on a venture basis didn’t necessarily have better alternatives.
Whatever the motivation, investors can’t escape the fact that the higher a stock flies, the harder it falls. Just as sobering, it’s not clear when the drawdown will fizzle out. Just going by the technicals, it’s not a rosy picture.
TWLO hasn’t been a publicly traded stock long enough to have a 200-day moving average, but it’s certainly weakening in terms of shorter-term technicals. The stock blew through its 20-day moving average about a month ago. TWLO broke its 50-day MA soon thereafter. A mid-month death cross adds to the downside momentum.
Twilio took a steep tumble after it announced a secondary offering, but the stock was in a downturn long before that happened. There’s more going on and you can bet valuation was a big part of it.
What’s Next for TWLO Stock?
As a company that that sends text messages on behalf of services like Uber and Facebook Inc’s (NASDAQ:FB) WhatsApp, Twilio has a tremendous growth opportunity. That is, if it can avoid being “disrupted.”
Encouragingly, TWLO delivered a quarterly report that could put the brakes on its slide. It’s impossible to say for sure, but Twilio stock might be bottoming out right now. Indeed, there’s a good case to be made that the selloff is overdone. After all, it’s bristling with growth. Here’s something from William Blair equity research on the company’s quarterly numbers:
“Twilio reported strong third-quarter results with revenue increasing 62%, to $71.5 million, $4.3 million above consensus expectations, and non-GAAP operating loss of $3.4 million, $4.0 million above the Street mean. More importantly, base revenue increased 75%, to $64.1 million, coming in $0.6 million above our estimate of $63.5 million. Twilio added 3,678 new base customer accounts during the quarter, an increase of 45% year-over-year, with total base customers of 34,449; we view this healthy customer account growth as a good indicator of the company’s business. Further, the company maintained an impressive dollar-based net expansion rate of 155% during the quarter, suggesting that existing customers continue to expand usage at a rapid pace. Management raised full-year 2016 revenue guidance to $268 million-$270 million, which registered nicely above of the Street mean of $261.1 million (56% growth).”
That’s a jaw-dropping growth rate in any economy. No wonder investors are paying so much for forward earnings. That’s a hot company, so why not a hot stock?
Because it looks like the market is already pricing in the explosive growth rate. The fundamentals are there, they are just mispriced. At some point, a better entry price will make TWLO very attractive again.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
