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Sorry, Twilio Inc (TWLO) Stock Is Not a Short!

TWLO stock is possibly overvalued, but shorting it is a bad idea

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Twilio Inc (NYSE:TWLO) stock isn’t cheap, to be sure. Even with TWLO more than 50% off late September highs, the stock still trades at over seven times the midpoint of its 2017 revenue guidance. And that multiple excludes the company’s $300 million in cash. Meanwhile, the price-earnings ratio for Twilio stock is infinite because the company is unprofitable, and rather sharply so. 2017 guidance implies an operating loss of $13 million to $17 million on a non-GAAP basis.

In other words, for every dollar of revenue Twilio generates this year, it expects to lose at least 4 cents, plus another 3 to 4 cents in stock-based compensation. (That dilution is excluded from Twilio stock’s non-GAAP figures.)

So if, Inc. (NASDAQ:AMZN) is overvalued at 62 times earnings, TWLO stock must be even moreso. And that should make Twilio stock a tempting target for short sellers.

But it’s not that simple. TWLO is a growth stock after all, and growth stocks can stay elevated for a long time. Short sellers indeed have targeted TWLO stock, one reason shares have declined so sharply of late. But as those same short sellers say, “Valuation is not a catalyst.” And recent history proves them right.

Yes, The Numbers Matter

Value investors, in particular, often criticize stocks like TWLO, with more than a bit of frustration in their voice. “I guess, for growth stocks, the numbers don’t even matter.” (AMZN shareholders surely are familiar with that sentiment.)

But that’s not the case. A company like Twilio isn’t supposed to be profitable yet. It’s not even a decade old, which isn’t a long time in the competitive tech space. It’s investing money in attracting new customers to its cloud communications service, which is what it should be doing. There’s no need to forego that spend for profits now, when that spend can drive far more profits later.

Purely from a valuation standpoint, it’s too simplistic, particularly in the PaaS/SaaS space, to look at profits without context. It’s better for Twilio to spend a dollar on sales and marketing now — even if that adds to its net losses — if that dollar is worth $3 in sales later. And the reason cloud stocks have been so hyped — and so highly valued — is that $1 upfront doesn’t just lead to $3 later … Rather, it leads to $1, or even $2,  for years and years and years.

So there are investors who are taking the long term — and, dare I say, fundamental — approach toward Twilio stock. TWLO’s valuation is based not on what it’s doing in 2017, but what it can do in 2020, or 2025. That leads to quite a bit of volatility, as seen in TWLO’s short time on the public markets. But that volatility doesn’t mean TWLO longs aren’t paying attention, and it doesn’t mean TWLO is failing. Most notably, for short sellers considering TWLO, it doesn’t mean Twilio stock will keep going down.

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Article printed from InvestorPlace Media,

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