Bull market, Santa Claus rally or Trump Bump? Whatever it is, someone forgot to send cloud play and recent IPO Twilio Inc (NYSE:TWLO) an invite this year. But with 2017 fast approaching, a second look at TWLO is merited, because the stock should be able to deliver serious profits to traders.
Following a rocket-like gain of nearly 375% over three months from its June initial public offering price of $15 a share, Twilio has sent investors on an almost completely downhill ride. From a high of nearly $71 in late September, TWLO stock tumbled 60% at its recent low of $28.37 on Dec. 12.
The volatile price action in Twilio stock stock hasn’t been a complete disaster, though. Shares are still up over 100% from the IPO price. Nonetheless, for most ordinary investors, the price chart makes TWLO a cautionary tale regarding momentum investing in IPOs and getting too caught up in the hype.
A quick-to-emerge bearish narrative backed up by a surprise secondary offering, completed lockup period, some future growth anxieties and highly active short interest have all been part and parcel. But now, conditions are looking up once more for Twilio. Entering 2017, we might want to take a second look.
The Bull Case for TWLO Stock
From corporate giants such as Facebook Inc (NASDAQ:FB) and Home Depot Inc (NYSE:HD) to other emerging disruptors such as Uber and Airbnb, Twilio’s cutting-edge communications technologies have picked up a “who’s who” customer list. Twilio also has grown its active account base by 45% totaling more than 34,000 companies over the past year.
Admittedly, TWLO stock’s sales trajectory has been on the downswing the past few quarters, but the bar was set very high. For perspective, one need only look at Twilio’s recent Q3 revenue growth of 62% and this quarter’s (disappointing) forecast for sales growth to drop to between 40% and 45%.
To shed a bit more color on Twilio’s still strong prospects, last week a source leaked news the company is landing a larger and expanded contract with the Amazon.com, Inc. (NASDAQ:AMZN) AWS platform. The report has yet to be officially confirmed, but appears to make sense given the relationship. Incidentally, it was enough to force a bid of around 9.5% into TWLO stock’s heavily shorted float.
Looking forward, profits still are elusive. It could be a couple years until a measurable price multiple can be found. Nonetheless, appreciating other metrics such as enterprise value and comparing Twilio’s wherewithal to past high-profile IPOs does suggest TWLO stock is a value at current levels — at least to analysts at Drexel Lambert.
Twilio boasts a chart that suggests the shorts may need to rethink their strategy So, 2017 could prove to be an up, up and away situation for this cloud play.
TWLO Stock Chart
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On the other hand, Twilio would not be seen as more attractive if shares were to move lower. With an absent bottom line and cash flow, it’s important to draw this line in the sand.
For money management purposes, a 10% stop is an initial allowance for TWLO stock. This leeway seems appropriate given Twilio’s volatility without getting too caught up in hoping that a bottom holds within a wide area of support.
TWLO Bull Call Spread
A vertical strategy fits in well. I suggest a bull call spread based on the quoted markets, as it cuts down on Greek options risks associated with outright long or short contract positions such as a long call or short put.
The Feb $35/$40 bull call spread looks attractive here. This play is priced at $1.25 with TWLO shares at $32.61, and it cuts down long premium risk by nearly 50%. Should the existing double bottom improve upon last week’s high of $35.15, the out-of-the-money vertical will begin to build real intrinsic value.
Optimistically — but not unrealistic given Twilio’s volatility, sufficient time and potential help from short interest — if TWLO gets above $40, a return of $3.75, or 300%, is possible. At the same time, should Twilio fall short of our expectations, risk is contained to the debit paid and less than 4% of holding TWLO stock on an equivalent basis.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
