This year has been slim pickings for initial public offerings of technology companies. However, Twilio Inc (NYSE:TWLO) hopes to shift the momentum with its groundbreaking approach to data and networking solutions.
Best of all, San Francisco-based TWLO has a high-level clientele list including Uber, which has also flirted on and off with IPO rumors. Thus, if anything is going to break the tech doldrums, it’s going to be Twilio stock.
For those first few months, the markets couldn’t get enough of TWLO stock. On opening day, shares popped up nearly 92%. That’s a remarkable swing for the month, let alone on a debut.
Those early investors didn’t get buyers remorse, either. Within a few days of the IPO, Twilio stock again added another 27% of market value. The freshness may have died down slightly, but the performance was still raging.
The Two Faces of Twilio Stock
The enthusiasm appeared wholly justified. This wasn’t a flight-by-night operation, full of flash but lacking in substance. The integrative services provided by TWLO simplify a host of complex challenges ranging from application design to international communication. Its inherent usefulness drove more than 21 million shares of Twilio stock to be exchanged on its IPO day.
But, we all know Wall Street’s motto, “What have you done for me, lately?” And, in that context, TWLO stock is a disaster.
How else could you explain the 50% haircut in valuation that shares have incurred since the beginning of October? As it stands right now, Twilio stock is only 15% above its IPO closing price. That’s a stunningly negative turnaround for a company that has returned 187% profits from trough to peak. Instead of being the toast of the town, Twilio faces the ignominy so common to the tech startup.
Some analysts — most notably Oppenheimer — don’t see it this way. The digitalization of everything is drawing demand for smarter apps to provide increasingly relevant data. That doesn’t happen unless there is a way to consolidate the wealth of information available into succinct, usable formats. Therefore, investors are encouraged to take a long-term view of TWLO stock.
TWLO Stock Faces Harsh Reality
It clocked in a loss of 4 cents per share on sales of $71.5 million, far more favorable than the 8-cents-per-share loss on revenue of $70.9 million that analysts had forecasted. Sadly, that did not stop Twilio stock from dropping 5% in the extended session.
At first glance, it doesn’t make much sense. Not only did earnings top, the company raised its full-year forecast on both earnings and revenue. Also, TWLO stock reacted well in August after its first quarterly report as a publicly-traded entity. There seems to be a huge disconnect between the technical performance and the fundamentals.
Then again, maybe not.
The financials for Twilio stock are a bit like Dr. Jekyll and Mr. Hyde. The balance sheet, for the most part, is superb — the influx of cash from an IPO certainly helps. But, the contrast is that this is an organization that has been losing money year over year.
The Q3 beat doesn’t change that dynamic because we’re not talking in terms of winning, but of not losing as badly.
Only the Bears Love TWLO
No matter how much of a great spin management puts on, smart investors refuse to take a bite. You can see it in the pensive ratings that most major analyst firms give TWLO stock.
An even more pronounced metric comes in the form of the short interest. In fact, the bears have been steadily piling against Twilio stock shortly after its IPO. Between June 30 and mid-October of this year, short interest jumped 369%.
I understand the contrarian argument that short interest is an early indicator of a reversal. The problem is that I’m not sure when that reversal is going to come, if at all. Facebook Inc (NASDAQ:FB) had early doubters, until they were all proven wrong. Twitter Inc (NYSE:TWTR) had early doubters, until they were largely proven right.
The difference with Twilio stock is that we rarely see such pronounced bearishness for a company unless it is truly a terrible organization. I’m not saying that Twilio is a terrible company — far from it, actually.
But if The Wall Street Journal is alarmed by the short activity surrounding TWLO stock, we should all be.
At this point, it’s a matter of staying safe as opposed to taking a very heavy risk.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
