The Twilio Inc (TWLO) Stock Rout Is Over. What Now?

TWLO stock is attractively priced after an overdone selloff, but momentum isn't here yet

By Dan Burrows, InvestorPlace Feature Writer

The last time we looked at Twilio Inc (NYSE:TWLO), TWLO stock was in a steep selloff that stretched back more than a month. Now the bulls can cheer at last, as it appears that the long correction in Twilio stock has run its course. Whether it can regain upside momentum, however, remains to be seen.

Twilio has always been a dramatic stock: Shares immediately gained 90% from its initial public offering last summer and, by its peak, TWLO stock had more than quadrupled. That took all of three months.

By the end of September, however, the market had had enough. Profit-taking, valuation concerns, a secondary offering … whatever the reason, sellers came to the fore. After a brutal October drawdown, Twilio stock lost more than half its value.

Just as no single criticism could be held responsible for such a damning selloff, neither can we pinpoint a reason for the recent resurgence in TWLO stock. Indeed, Twilio’s stock price surged 22% from $30.52 on Nov. 7 to $37.39 on Nov. 22. That rally has tapered to a 6% gain, but a bit of profit-taking is to be expected.

TWLO Stock: High Risk, High Reward

That’s just how it goes with this pricey, high-growth name. The initial public offering was an over-exuberant affair — probably due to the fact that it was skimpy year for tech IPOs in general — and the snapback was just as emotional.

As a cloud-services company that sends text messages on behalf of clients like Uber and WhatsApp from Facebook Inc (NASDAQ:FB), Twilio has a tremendous growth opportunity. The rub is that it’s also priced that way. Even after the cool off, shares look expensive. There are no earnings to work with, so there’s no price-earnings ratios to go by, but a price-book value of 11 speaks for itself.

The market is expecting Twilio stock to grow into its valuation, and with a long-term compound annual growth rate of 20% for the next five years, it’s reasonable to think it will get there.

But that doesn’t mean it’s not somewhat speculative.

Encouragingly, Twilio’s quarterly report helped put the brakes on the slide in TWLO stock, allowing it to bottom out. And anytime a stock falls as far and as fast as TWLO did, it’s worth taking a fork to the selloff to see if it’s overdone. After all, this company is bristling with growth. William Blair equity research had this to say about the company’s quarterly numbers:

“Twilio added 3,678 new base customer accounts during the quarter, an increase of 45% year-over-year, with total base customers of 34,449; we view this healthy customer account growth as a good indicator of the company’s business. Further, the company maintained an impressive dollar-based net expansion rate of 155% during the quarter, suggesting that existing customers continue to expand usage at a rapid pace.”

Bottom Line on TWLO Stock

That’s a hot company. So naturally it’s a hot stock. Just don’t forget that hot stocks are often volatile.

Think Netflix, Inc. (NASDAQ:NFLX), which is one the market’s more melodramatic names; NFLX crushed the broader market over the past one-, three- and five-year periods, but it hasn’t always been pretty.

It’s also important to note that just because a bottoming process might have run its course doesn’t mean upside from here is guaranteed. Sideways trading remains a very real possibility until TWLO stock delivers its next catalyst.

That could take months.

As expensive as it still is, TWLO stock is much more attractively priced than it was a couple of months ago. If you’re comfortable with reaching for outperformance and can handle the risk, Twilio has the makings of a market crusher.

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

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