Today’s bounce from Twilio Inc (NYSE:TWLO) stock would superficially suggest the selloff is over. See, as of Monday, Twilio stock had given up 37% of its value from its September peak, forcing even the most faithful of owners to question their patience.
Tuesday’s rebound from Twilio stock is a much-needed and mostly overdue glimmer of hope that the bullishness following its June initial public offering is about to be rekindled.
Before coming to any long-term conclusions based on the short-term picture of TWLO, though, a reality check is in order. Twilio stock may be up today, but a glaring problem for this stock is about to get even worse. Sooner or later, everything gets factored in.
What’s a Twilio?
For the unfamiliar, Twilio Inc is a technology company that’s turned a cloud computing platform into a robust telephony and messaging tool. Anything a business could want to do with, or through, a phone, Twilio can make it happen securely.
That’s impressive. And it’s why the IPO in June went so well, sending Twilio stock soaring from an initial public offering price of $15 per share to a high of $70.96 late last month — the buzz was just that strong, and clearly there’s a market for such services.
While TWLO cooled off a bit in early October, it was still no cause for concern. After all, newly-IPO’d stocks are inherently volatile, and a little profit-taking is to be expected, right? In that light, the $400 million secondary offering announced a little over a week ago can’t be alarming. The bulk of it is simply one of its early investors locking in a gain. Only a small portion of that $400 million worth of TWLO is being sold by the company itself.
And yet, there’s a giant “what if” hanging out there with Twilio that a few investors are finding it tougher and tougher to ignore.
Sooner or Later
It will come as no surprise to hear that Twilio was a hyped-up IPO, in the same vein as the initial public offerings from names like Groupon Inc (NASDAQ:GRPN) and Facebook Inc (NASDAQ:FB). Indeed, it would be surprising if Twilio stock wasn’t on the receiving end of a massive amount of hype. It’s just par for the course in the modern market.
The problem with hype (and crowd-think) is that it can lead investors, analysts and even the media to believe some rather amazing and unlikely things.
And yes, the potential upside of Twilio stock is one of those things most have accepted as truth whether it’s a rational conclusion or not.
Don’t misunderstand. Twilio is a compelling growth story. The company it is today isn’t the company it will be a year from now. Even the company it could plausibly be a year from now, however, doesn’t justify the current valuation.
As of the latest look, Twilio isn’t profitable, and isn’t expected to be profitable next year either. That’s not a concern — lots of new companies take a while to work their way into the black. Of concern here is the company’s revenue relative to its nearly $4 billion market cap. Analysts collectively expect Twilio to generate $259 million in revenue this year, and sales of $332 million next year. That translates into a forward-looking price/sales ratio of 11.7, versus the market-norm of 1.9.
Said another way, even if Twilio was to turn a fairly typical 10% of its 2017 revenue into net income — about $33 million — it would be trading at a price-earnings ratio of 118, versus the S&P 500’s current P/E ratio of 24.3 … not that earnings are in the cards anytime soon.
In other words, even by the most optimistic measures, Twilio stock is still grossly overvalued. At its current pace, it wouldn’t be fairly valued for three to four more years. At least some shareholders have to recognize this reality, largely explaining the recent, decided weakness.
Bottom Line for Twilio Stock
None of this is to say TWLO shares won’t move higher at some point from here; today’s strength may be the beginning of such a move. Don’t be misled about the reason, though. It would be the lingering post-IPO hype doing the bulk of that bullish driving rather than a reasonable, plausible, growth-based rationale.
The hype train can be fun to ride while it’s in motion, but it all too often comes to a screeching halt and ends with a spectacular crash as a stock’s value finally gets right-priced. Trouble is, there’s no telling when that crash might take shape.
Tread lightly, because someone out there is crunching the numbers now that the IPO noise is no longer echoing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
