If you thought things couldn’t possibly get worse for Twilio Inc (NYSE:TWLO), think again. From where we’re sitting, the environment looks increasingly hostile for the cloud play: No profits, negative cash flow, tracking below quarterly and full-year guidance … It’s pretty hard being Twilio. But it could be worse.
One place where conditions have been even harsher is for buy-and-hold investors of TWLO stock. If you bought in during last year’s supportive debut and bullish-looking rally, but failed to trim that stake, a swift gain of nearly 200% followed by an even faster collapse has been a painful turn of events.
Despite TWLO stock shedding 65% from its highs and flirting with its all-time-lows, investors aren’t done pulling out of shares.
One problem is momentum traders are long gone. That’s quite obvious considering what’s been said regarding TWLO stock. It’s unlikely that value investors will be impressed with Twilio shares at today’s prices either. There’s also a fairly hefty price-to-sales ratio of 7.3. Considering its dwindling prospects, that optimism (or denial if you will), makes TWLO stock even more outrageously expensive.
The fact is, even Twilio’s attractive revenue growth is projected to take a hit due to rising commoditization and competition, there’s little in TWLO stock that makes it a good buy. Twilio’s largest customer, Uber, recently announced that it is taking its business elsewhere. There’s also been murmurs the company’s key relationship with Amazon.com, Inc. (NASDAQ:AMZN) is possibly a breakup in the making.
And now there’s word Airbnb has been packing up some of its business and taking it elsewhere. So what’s next? In our view, one trader’s hopeful bottom looks much more like a bearish chart pattern setting up for more difficulties ahead for TWLO stock and its shareholders.
TWLO Stock Daily Chart
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Given the concerns addressed already, this strategist is strongly inclined to forgo optimism in favor of a more supportive bearish breakdown, putting the finishing touches on a flag pattern that should result in new all-time lows.
TWLO Stock Long Put Strategy
In reviewing Twilio’s options, premiums are cheap both on a relative and statistical basis. In lieu of our bearish view, I like the idea of an intermediate-term long put strategy to best take advantage of this overall situation. One TWLO option that fits in nicely is the Oct $20 put. Priced for $1.30 mid-market with shares at $24.48, new lows will ultimately be required as far as the ability to profit at expiration. In fact, a fairly staunch decline of 24% is needed simply to break even.
The good news is combined with reasonable premiums, an August earnings catalyst and plenty of time on the calendar, pressure in TWLO stock should be accretive to the bottom line at a much higher share price than the breakeven at expiration.
As well, considering that TWLO stock is unable to support its own bottom line and is showing technical cracks, the trend should be favorable for this kind of limited-risk, bearish positioning.
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.
