Less than a month off the end of an IPO lock-up period, Twilio Inc (NYSE:TWLO) is now gearing up to join the rest of Wall Street in the earnings limelight. The cloud communications specialist will step onto the earnings stage on Feb. 7, and TWLO stock bulls are already lining up to bet on a rally. With Twilio down nearly 60% since its September highs, next month’s quarterly report will be closely watched.
By the numbers, Twilio is expected to post a loss of six cents per share for the fourth quarter. Revenue is seen coming in at $74.12 million. The company’s bottom line is heavily dependent on Facebook Inc’s (NASDAQ:FB) WhatsApp messaging service, which accounted for 10% of revenue in the first nine months of 2016. Facebook has now added Twilio’s service to its Messenger app, which should help bolster results this quarter.
Unfortunately for TWLO stock investors, Facebook remains a “Variable Customer Account.” In other words, Twilio has no contract with Facebook and the social media giant can drop services at any time — something to remember going forward into 2017.
Despite the risks to Twilio’s bottom line, Wall Street remains quite bullish on TWLO stock. According to Zacks, six of the 10 analysts following TWLO rate the shares a “buy” or better, with no “sell” ratings to be found.
Meanwhile, the consensus price target of $38.44 represent a hefty 38% premium to yesterday’s close. While expectations are lofty, if Twilio can offer up solid guidance it will validate these bullish claims and bring more buyers to the table.
On the short-selling front, the bears appear to be in retreat when it comes to TWLO stock. During the most recent reporting period, the number of TWLO shares sold short plunged by 10% and now number roughly 8.7 million shares. Despite the decline, more than 28% of TWLO’s float remains sold short and could provide considerable fuel for a short-covering rally.
Click to Enlarge Options activity also points toward bullish expectations. Currently, the Feb. put/call open interest ratio rests at 0.37, with calls nearly tripling puts among options set to expire within the next month. Furthermore, this ratio has plummeted from its perch at 0.98 in mid-December. Whether this rise in call open interest is due to bullish TWLO buyers or short sellers heading their positions, it’s clear that the TWLO options crowd expects the shares to move higher.
How much higher? February implieds are currently pricing in post-earnings move of about 17% for TWLO stock in either direction. This places the upper bound at $32.80, while the lower bound lies at $23.20. A rally would put TWLO stock back above its 50-day moving average and resistance at $32. Meanwhile, a post-earnings drop could place the shares at all-time lows.
2 Trades for TWLO Stock
Call Spread: Traders looking to take a chance on a TWLO stock rally following earnings might want to consider a Feb $28/$29 bull call spread. At last check, this spread of Twilio options was offered at 33 cents, or $33 per pair of contracts. Breakeven rests at $28.33, while a maximum profit of 67 cents, or $67 per pair of contracts, is possible if TWLO stock closes at or above $29 when Feb. options expire.
Put Sell: That said, February implieds are quite high at the moment, making selling premium quite attractive. If you’re not sold on the TWLO stock’s upside potential, then a Feb $23 put sell has a good chance of finishing out of the money.
At last check, this put was bid at 61 cents, or $61 per contract. As long as Twilio stock trades above $23 through Feb. expiration, traders pursuing this strategy will keep the $61 premium. However, if TWLO stock trades below $23 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $23 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.