Twilio Inc (NYSE:TWLO) is pulling off a nice bullish move today, and over the past couple of weeks. Roughly 5% returns today has TWLO stock up more than 15% in a very short time.
Unfortunately, this has all the smell of a relief rally, and investors should be cautious with Twilio — a top player in the cloud-based communications industry — going forward.
Twilio has been rangebound for much of the year, coming off a grueling decline since the company came public back in June; even with its rally, Twilio’s current $32 stock price is well off its peak of $69.
The plunge in TWLO stock occurred despite a strong growth ramp. Last year, Twilio posted revenues of $277.3 million, up 66%, while narrowing its GAAP net loss from $2.19 per share to just 78 cents.
Going forward, TWLO has ambitions to get a bigger piece of the enterprise market. In the latest quarter, the company snagged marquee customers like Capital One Financial Corp. (NYSE:COF) and the Blue Cross Blue Shield companies.
But despite all this, I still think that investors should be cautions with Twilio stock, for three reasons:
Issue #1: Customer Concentration
Earlier-stage tech companies usually have a fair amount of customer concentration, but it’s substantial in Twilio’s case.
Last year, 10 of the company’s largest active customer accounts represented 30% of the total revenues. Of these, two customers generated an outsized share. Facebook Inc’s (NASDAQ:FB) WhatsApp came to 9% of revenues, and Uber was about 10%.
That’s a problem, especially when contracts generally can be canceled at any time. Losing one of those customers could wreak havoc on TWLO stock. And even if it doesn’t happen, Twilio still could sustain more pressure on pricing. It’s not difficult to switch to another rival service; after all, a key advantage to APIs is that they’re easy to implement.
Issue #2: Valuation
Twilio stock absolutely deserves a robust valuation, as the company is targeting a massive market opportunity. But the current multiples are a stretch.
Take price-to-sales, which is at a nosebleed 9.5x right now. Compare this to other fast-growing cloud operators:
|Box Inc (NYSE:BOX)||5.5X|
|Apptio Inc (NASDAQ:APTI)||2.8X|
|Zendesk Inc (NYSE:ZEN)||8.8X|
And after a hot IPO plunges, it can be tough to regain the confidence of investors. This has certainly been the case with BOX, which languished for several years.
Issue #3: The Amazon Factor
Over the years, Amazon.com, Inc. (NASDAQ:AMZN) has built its own communications platform, which is focused on call center operations. The company saw this as critical to its e-commerce business. But now Amazon is selling the technology, as Amazon Connect, which can be set up in just a few minutes.
How will Twilio be affected?
So far, Wall Street is divided. Bulls believe Amazon will popularize cloud-based communications and this should help to expand the market. But AMZN ultimately will lower prices, probably aggressively, and that will pressure Twilio. What’s more, AMZN has the advantage of its AWS system, which has a massive user base.
I tend to be in the camp of Global Equities Research analyst Trip Chowdhry, who recently said, “Pretty much TWLO is toast.”
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.