Twilio Inc (TWLO) Stock Rallies on HUGE Upside Potential

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It’s been a roller coaster experience with Twilio Inc (NYSE:TWLO) since its IPO in late June. Within its first three months as a publicly traded company, TWLO stock rose by over 137%, before getting dealt a huge blow in October. Since then, TWLO has lost roughly 53%.

Twilio Inc (TWLO) Stock Rallies on HUGE Upside Potential

As of Dec. 19, TWLO stock had lost roughly 8.5% in December alone. However, the stock price decline improved to just under a 5% loss by Dec. 21.

The gain here came after Drexel Hamilton analyst Brian White initiated coverage on TWLO stock, tagging it a “buy” with a $45 a share price target. That’s over 30% upside potential.

TWLO Stock Valuation Problem

The truth is that TWLO stock looks overvalued, going by its financials. That’s a big reason it’s struggled during its first few months in the market.

TWLO currently makes no profit. It recorded a loss of about $35.5 million in 2015. In 2014, Twilio stock grew its top line by roughly 78%. In 2015, top line growth came in at roughly 88%. However, the company expects only 61% revenue growth this year. That’s worrying because the company is nowhere near the point where growth should be slowing down.

On top of that, TWLO stock currently sports a price-sales ratio of just under 11. A company with similar growth rate, 58.com Inc (ADR) (NYSE:WUBA) has a P/S ratio of four and expects to report 60% revenue increase this year. It gets even worse for TWLO on considering that WUBA is expected to report such revenue growth, having grown its top line from just over $87 million in 2012 to roughly $715 million in 2015.

Still, valuation isn’t everything for companies in early growth stage. If not, Tesla Motors Inc (NASDAQ:TSLA) would probably never have been a good buy.

TSLA sported a P/S ratio of about 25 in 2012. That has improved to just over five as of this writing. The growth potential is usually what matters when looking at early growth companies like TWLO stock.

Analyst’s Case for TWLO Stock

Moreover, analyst White believes all isn’t lost for TWLO in terms of valuation. In his research note obtained by Street Insider, he said:

“Currently, Twilio trades at an EV/revenue ratio of 6.3x our CY:17 sales forecast and well below the 9-22x EV/ NTM ratios (up to three years after an IPO) of high growth companies (seventeen companies we analyzed) of the past. Given the sharp decline in Twilio’s stock since September (down 59%), we believe the market has already discounted the lock-up expiration that begins this week”

The translation of this is that, the entirety of Twilio Inc is valued fairly relative to its revenue, compared to other 17 high growth companies that Drexel Hamilton has analyzed. Another version is that, at current levels, the company’s revenue should be very attractive to potential acquirers.

White also made mention of a first mover advantage in the cloud communications platform market. This market is worth over $45 billion, according to estimates from IDC. Interestingly, based on Drexel Hamilton’s 2017 revenue forecast, TWLO stock owns less than a percent of the market. Even at this, it’s still the biggest player in the cloud communications industry.

TWLO has been taking steps to grab more of this market. In the third quarter, it introduced the Twilio Enterprise Plan, which is designed to offer advanced security and access management for bigger organizations. It has also unveiled Voice Insights, which gives developers deeper analytics of the users of their voice applications.

Bottom line on TWLO Stock

As stated above, most of the valuation metrics you’d want to look at would tell you that TWLO stock is overvalued.

However, it’s still an early growth company with a disruptive concept. Innovative companies like Facebook Inc (NASDAQ:FB), Uber and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are using Twilio.

TWLO is definitely worth a watch especially if you’re looking to invest in a disruptive company.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/twilio-twlo-stock-upside/.

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