With Twilio Inc (TWLO) Stock, It’s Best to Wait and See for Now

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Cloud communications app maker Twilio Inc (NYSE:TWLO) is set to report second-quarter earnings after the bell today. The report may be very good (TWLO stock is rallying today), but it also could be very bad (today’s rally is against the backdrop of what has been a sharp sell-off since late July).

TWLO Stock: With Twilio Inc (TWLO) Stock, It's Best to Wait and See for Now

Overall, TWLO stock is far too risky here for my taste. The company may be a solid long-term investment at some point. But right now, there is just too much near-term noise that threatens the legitimacy of TWLO’s long-term growth narrative. Until that noise is silenced, there remains little reason for a risk-adverse investor to buy TWLO stock.

Consequently, I say the strategy here is “wait and see.” You might miss a big pop, but if the report is that good, the stock has a lot of ground to recover. The post-earnings pop will likely be just the beginning of a multimonth run-up.

On the other hand, you might miss big drop, and that’s always a good thing. In other words, by playing the “wait-and-see” game, investors are giving themselves a chance to get in on a promising long-term investment while avoiding significant downside risk.

TWLO Stock Has Lots of Growth Potential

Twilio is a cloud communications app maker, and that puts the company in the cloud computing space. That is the right space to be in, because everything is going to the cloud. That includes data storage, commerce and analytics.

It also includes communication, and that is where TWLO is king. The company provides solutions for hot, up-and-coming startups like Uber, Lyft, Airbnb and Shopify Inc (US) (NYSE:SHOP). They also provide solutions for the more mature companies like Facebook Inc (NASDAQ:FB), Nordstrom, Inc. (NYSE:JWN), Amazon.com, Inc. (NASDAQ:AMZN), Salesforce.com, Inc. (NYSE:CRM) and Paypal Holdings Inc (NASDAQ:PYPL).

That is a pretty impressive customer list. As those companies grow their digital and cloud presence, TWLO will naturally benefit. That makes TWLO a secular growth story into the foreseeable future.

Or does it?

Will That Potential Growth Materialize?

The most recent earnings report began to show cracks in that narrative.

Uber is Twilio’s biggest customer. The ride-hailing giant accounts for about 12% of revenue. Uber uses Twilio for driver and rider communication and driver marketing, among other used cases.

But Uber is starting to break away from Twilio. As opposed to paying Twilio for the full suite of services, Uber is starting to develop its own cloud communications platform. They are essentially “in-sourcing” Twilio’s services.

That’s no good, and it means Uber revenue will decline. But the bigger piece of concern here is with other companies. How many other TWLO customers can do the same thing Uber is doing?

Well, it’s a costly process that requires tremendous effort, scale and technology, but Uber is showing that it’s definitely doable. That means the companies likely to follow in the footsteps of Uber are tech giants that have the scale and capacity to pull off such a move. That includes Facebook, Amazon and Salesforce, among others.

Strip those hyper-growth tech names from the list of TWLO’s customers, and all of a sudden the long-term growth narrative looks a lot less compelling. Twilio will still service the up-and-coming tech upstarts who don’t have the scale or capacity to do it in-house, but that is a much smaller market. Without money pumping in from the big guys (namely Facebook, whose WhatsApp service accounts for 5% of TWLO revenue), the Twilio growth story looks severely at risk.

Bottom Line on TWLO Stock

It pays to remember that this was one of Wall Street’s favorite stocks shortly after its IPO. It all started with a bang on June 23 of last year, when TWLO stock rose 90% above its $15 IPO price in its first day of trading.

The run higher continued after the company’s first earnings report as a publicly traded company impressed across the board. The stock soared to a high above $70.

But it has been nothing but a struggle for TWLO stock ever since, and that puts TWLO stock in the group of “Unicorn IPOs” who have popped and dropped. GoPro Inc (NYSE:GPRO) and Fitbit Inc (NYSE:FIT) did the same thing. So did Shake Shack Inc (NYSE:SHAK). Most recently, it has been Snap Inc (NYSE:SNAP).

What do all of those stocks have in common besides their pop-and-drop dynamic after the IPO?

None of them have recovered.

It’s best for investors to wait and see with TWLO stock. The growth opportunity is compelling, but only if other tech giants don’t follow in the footsteps of Uber.

As of this writing, Luke Lango was long FB, AMZN, SHOP and PYPL.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/twilio-inc-twlo-stock-wait-see/.

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