Twilio Inc (TWLO) Stock Is Dead Money Until This Happens

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There’s no denying Twilio Inc (NYSE:TWLO) still has some fans and supporters on Wall Street. As of the latest look, TWLO stock still rates as slightly better than a “Hold” among analysts, and it’s still garnering bullish commentaries. Inasmuch as actions speak louder than words, however, the 45% pullback Twilio stock has suffered since its Sept. 28 peak says most investors aren’t exactly believers.

Twilio Inc (TWLO) Stock Is Dead Money Until This Happens

Who’s right and who’s wrong about TWLO? To be fair, both sides of the table have reasonably cogent arguments. When one is weighed against the other though, Twilio stock is more apt to move even lower before moving higher again.

TWLO Stock Too Hot for Its Own Good?

The Twilio IPO may be one of the least-publicized IPOs of 2015, but it was still well known enough to dish out a massive post-IPO gain. Twilio, which offers a variety of cloud-based communication services, became a publicly traded entity on June 23 at a price of $15 per share. Three months later it had gained 140%.

The prod, of course, was hope that the Twilio platform — which lets business send text messages and facilitates voice and video communications — would grow the top and bottom line as much as the pre-IPO hype implied would be the case. And to a large degree, the company’s growth history and outlook has been enviable.

In early October, TWLO projected it would report revenue somewhere between $70.25 million and $71.25 million for the quarter ending in September, up roughly 60% from the $44.3 million it posted for the comparable quarter a year earlier. That growth pace has been well-touted in the meantime too.

Yet, reality started to set in before September ended.

That reality is, Twilio is a company that’s on pace to generate $445 million in revenue next year, and was (at the time anyway), sporting a market cap of $5.5 billion. Never even mind the lack of profits. Even if TWLO were profitable, it would still struggle to justify a price anywhere near $70. Moreover, even after the selling, the trailing price-to-sales ratio is wildly high at more than 13.

Thing is, the worst may not be over yet.

The Bears Have the Better Argument, For Now

The stunning setback Twilio stock suffered over the course of October, while fundamentally merited, still isn’t the proverbial big Kahuna that could pour gasoline on the fire. That honor belongs to the end of the lockup that’s keeping the stock in the initial buyers’ hands until Dec. 20.

At that time, those investors — and they’re big-time owners — can exit their positions, injecting a flood of supply into the open market that will almost certainly drive TWLO stock lower … if those shareholders pull the trigger. Some of them may not want to, taking a chance that shares are poised for a recovery.

Others, however, may be glad to get out at any price better than a breakeven, sensing how much traders love to hate the stock. As of the latest look, TWLO’s short interest is a stunning 68%, meaning nearly two-thirds of the float is spoken for by investors who think it will go lower. Until the owners of those short positions collectively decide to let up, there’s little the bulls can do to stop the bleeding.

Of course, it’s not as if TWLO has done anything in the meantime to convince investors about its still frothy stock price. Just weeks after the Twilio IPO introduced the stock to the world, the company went back to the market to ask for another $400 million, capitalizing on the then-red-hot stock price.

Perhaps just as preemptively as traders sold TWLO stock before the lockup’s expiration in late December, the market recognizes the secondary offering will result in another post-lockup flood of stock as well.

Bottom Line for Twilio Stock

At another time (like the late-90s), the premise of the story would have been more than enough to supersede the sky-high valuation and lack of foreseeable earnings. Indeed, for a short while, Twilio stock was able to create that kind of exuberance.

Such stories don’t go unchecked any longer, though, and TWLO stock isn’t done being right-priced just yet.

That’s not a judgment call on the company. Twilio is a fine company, executing well on a marketable business premise in a growth industry. Better still, all that short interest represents a massive wave of buying in the future; the only way to close out a short trade is by buying those shares back. It’s a question of when and where those bears decide they’ve squeezed out all they can from their short positions. TWLO is handcuffed until that happens.

With Twilio stock still above its IPO price and still priced with plenty of room to edge lower, there are simply too many unknowns to justify taking on what would only be a very speculative position.

Welcome to trading.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/twilio-inc-twlo-stock-dead-money/.

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