Cloud play and recent IPO Twilio Inc (NYSE:TWLO) continues to enjoy Street support, but other issues both off and on the price chart continue to suggest not buying into the bull just yet. Let me explain.
It has been a couple months since I last wrote about Twilio stock. I was what you might call a cautious — or more aptly, an opportunistic — bull for the right price. And during that time, not much has changed.
For one, my opinion on TWLO stock still remains the same. If you don’t have profits, cash flow and persistently weak stock action trump cutting-edge cloud technology that has captured A-list customers like Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Home Depot Inc (NYSE:HD) and privately held marquee companies such as Uber and Airbnb.
Why the negativity regarding TWLO stock? Don’t I have any vision for TWLO stock’s future prospects? Forgive the repeat, but Twilio’s narrative continues to look too much like FireEye Inc (NASDAQ:FEYE).
The cyber-security outfit also had Wall Street’s blessing with ‘strong buy’ recommendations, spent aggressively to acquire top-notch companies — and has ultimately continued to bleed financially both off and on the price chart.
Maybe I’m wrong to read into those similarities as a warning? That’s always a possibility, but undeniably and nearly identical is TWLO stock itself. While volatile at times, shares are pretty much smack dab where they were back in mid-January near $28. That’s much closer to its all-time-lows of $23.66 than the Street’s consensus $38 target and all-time-highs of $70.96
TWLO Stock Daily Chart
Back in mid-January and after failing to hold a double-bottom pattern above key support, I thought technically, TWLO stock was poised for lower prices sooner, rather than later. It turns out I was wrong and an anticipated test of Twilio’s opening and all-time-low of $23.66 has yet to be tested.
More to the point, as TWLO stock persists in its weakness in the face of a market which refuses to give up the ghost, FEYE continues to serve as a reminder that skeletons in the closet do exist. As such, if you want to believe Twilio will eventually make a turn for the better, it’s time (once again) to consider a credit put spread.
TWLO Stock Credit Spread Strategy
While the TWLO stock price chart didn’t fully cooperate with my technical outlook, a below-market put credit spread did just fine last time around. And while I continue to see lower prices for Twilio shares, an out-of-the-money vertical still looks appropriate for investors receptive of buying the name at lower levels.
Reviewing the options market with TWLO at $28.25, the April $26/$24 put spread is priced for 30 cents and looks attractive given what has been stated. The seller of this vertical collects the credit as long as shares remain above $26 at expiration.
The $2.25 margin of safety from today’s $28.25 to the sold $26 strike put amounts to a decline of up to nearly 8% over the next three weeks, with the trader still able to collect the credit. What’s more, earnings aren’t until early May, so the chances of a larger drop in TWLO stock are obviously reduced.
Bottom line though, if TWLO stock was to decline into the spread or lower and the investor wishes to buy shares, the worst he or she would do is $25.70.
And in the event of a crash, the opportunity to purchase stock for no more than $1.70 above whatever the market might determine as fair value, is a nice limited-risk proposition to consider.
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.
