Why Twilio Inc (TWLO) Stock Could Be Doomed

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If something doesn’t happen soon, Twilio Inc (NYSE:TWLO) will be a dead stock trading. Okay, maybe that’s a bit over the top. However, the technical signs do not look good at all. At this point, only those who got in at the initial public offering are profitable. At a share price of under $25, TWLO stock has dubiously broken its all-time closing low.

Why Twilio Inc (TWLO) Stock Could Be Doomed

I’ve been consistently concerned about Twilio stock when its IPO dream turned into a nightmare.

My basic thesis is that if Wall Street thinks TWLO is such a great opportunity, it would be conspicuously reflected. But when you consider the slide since September of last year, the enthusiasm is non-existent.

Some analysts have viewed the volatility in Twilio stock as a contrarian buying opportunity. Again, I don’t see this argument’s validity other than a spot-reaction to trading patterns. Shares lost more than 58% between Sep. 28 to Dec. 30 of last year. Investors will need a lot more than “contrarianism” to justify this risk.

In my opinion, Wall Street wants something from Twilio stock that’s simply not there. TWLO is levered towards the cloud communications business, which is a hot business. In their estimation, the company should be soaring. FireEye Inc (NASDAQ:FEYE) recently demonstrated that an underperformer in a soaring industry is still a viable investment.

But the markets aren’t showing love to TWLO stock, and their quarterly results shows us why.

Even Twilio Doesn’t Buy Into TWLO stock

On paper, the financials for Q1 beat expectations. Twilio stock turned in an earnings-per-share loss of 4 cents, above analysts’ consensus by a margin of 2 cents. Sales results were also encouraging. TWLO hauled in $87.4 million against an estimate of $83.60. Yet for all that optimism, company shares dropped more than 26% in the markets.

What happened? As with many things related to Twilio stock, it’s a matter of perception not meeting reality. While the past numbers were great, the forward guidance was awful. According to InvestorPlace writer Tom Taulli, for the current quarter, “the company forecasts a loss of 10 cents to 11 cents and revenues ranging from $85.5 million to $87.5 million. The Street estimate, on the other hand, was for an 8 cent loss and revenues of $87.8 million.”

Additionally, the full-year guidance was disappointing. Before the earnings report, analysts expected an EPS loss of 16 cents, and top-line sales of $370 million. Instead, Twilio is bracing for a loss between 27 cents to 30 cents, with sales of $356 million to $362 million.

As Mr. Taulli explains, “Granted, such divergences may seem kind of minor. But then again, TWLO stock sported a frothy price-to-sale ratio of 11X ahead of the earnings. So even a slight change can make a big difference in the valuation for TWLO.”

Twilio Stock: The Obvious Answer Is the Answer

TWLO stock, Twilio stock
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Source: Source: JYE Financial, unless otherwise indicated

At its present price tag, Twilio stock hangs dangerously below the technical support line at roughly $27. This is the point where two prior bearish attacks failed, resulting in a (temporary) move higher.

It’s also the point where TWLO stock traded range-bound for its first three days before spiking higher. In other words, psychology is baked in at $27. If it doesn’t move higher soon, I foresee real ugliness.

I believe most proponents are overlooking the lack of fundamental momentum. Even if sales hit the top end of Twilio’s estimates, that would only represent 30% growth from FY 2016. Furthermore, their business expenses and especially research and development costs are jumping considerably. It’s really not a great combo — slowing top-line growth and rising costs. So am I surprised that TWLO stock is in trouble? Not in the least!

I’m also not surprised that investors want to side with the contrarians on Twilio stock. Just a little less than a year ago, TWLO was the toast of Wall Street. The thinking is that lightning will strike twice. But the company wasn’t convincing back then, and they’re not doing a good job right now.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/twilio-inc-twlo-stock-doomed/.

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