Why Twilio Inc (TWLO) Stock Is Still a Pass … For Now

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Twilio stock - Why Twilio Inc (TWLO) Stock Is Still a Pass … For Now

Just because a company is solid does not mean it will be a good IPO — at least for those investors who buy in the aftermarket. A great case study of this is actually Twilio Inc (NYSE:TWLO). Back in late June, the company pulled off its offering at $15 a share and Twilio stock quickly ran up to a nosebleed $69.

Why Twilio Inc (TWLO) Stock Is Still a Pass ... For Now

Yet gravity took hold. Now, TWLO stock is hovering at about $32.

Although this might sound ugly, there can certainly be opportunities to bottom-fish with fallen IPOs. The question is … does Twilio stock fit the bill?

Admittedly, it’s tough to find fault with the company’s business. TWLO stock is in no way like some of the other IPOs that have imploded, like Twitter Inc (NYSE:TWTR), Fitbit Inc (NYSE:FIT) or GoPro Inc (NASDAQ:GPRO). These operators truly have fundamental issues, and they have paid the price.

So it does seem very unlikely that Twilio stock will plunge to the single digits.

Rather, the company is the clear leader in cloud-based communications systems. Features include SMS, chat, voice calling and video. More importantly, TWLO has been smart to allow developers to embed the technology easily within their own apps. Basically, there is only a payment charged when there is meaningful usage.

Twilio has also been leveraging its platform into the valuable enterprise market by adding sophisticated authentication and security features (a key to this has been obtaining ISO 27001 certification, which is a global standard for security).

Just some of the recent marque customers added include Blue Cross Blue Shield and Capital One Financial Corp. (NYSE:COF). Interestingly enough, it looks like one of the biggest market opportunities for TWLO is the call center segment, which has suffered from lagging technology.

So, it should be no surprise that the growth for Twilio has been strong. In the latest quarter, revenues soared by 60% to $82 million.

The Risks for Twilio Stock

Despite the strengths of the company, I still think patience may get you a better valuation. To paraphrase an old saying: TWLO may be a good company, but it is a bad stock.

In fact, short sellers seem to think so. Keep in mind that about 18.5% of the float of Twilio stock is in short positions.

So why the bearishness? There are many reasons. As with many other fast-growing tech companies, TWLO continues to report losses, even though they have been coming down. In the latest quarter, the company reported a GAAP loss from operations of $12.8 million.

Next, there remains substantial customer concentration. Last year about 30% of revenues came from only 10 customers. In fact, Facebook Inc’s (NASDAQ:FB) WhatsApp accounted for 9% and Uber for over 10%.

Of course, this is not to imply that these companies will suddenly bolt. Although, they may use their leverage to get better terms, which could lead to diminishing revenues over time. Overall, this might be a long-term overhang on Twilio stock.

Bottom Line On Twilio Stock

The biggest knock on the company seems to be the valuation. Consider that TWLO stock trades at a nosebleed 10X revenues. While a premium is deserved for a fast-growing company, this multiple does appear to be a stretch.

To put things into perspective, there are other enterprise cloud operators that are growing at a brisk pace and are gunning for massive market opportunities but have valuations that are more reasonable. For example, one is New Relic Inc (NYSE:NEWR), which is trading at about 7X and then there is Box Inc (NYSE:BOX) with a 6X multiple.

In other words, why go for something like Twilio stock when there are alternatives? I’m not sure. Then again, this may be a big reason why the company’s shares have been treading water lately, despite strong earnings reports.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A BundleFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/twilio-inc-twlo-stock-still-pass/.

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