To say Twilio Inc (NYSE:TWLO) has taken investors on something of a roller coaster ride over the course the past eight months would be a considerable understatement. Twilio stock rallied from its June IPO price of $15 to a high near $71 by September, only to peel back to a low of less than $26 in January.
Since hitting that low, TWLO stock has gained more than 20% … right in front of the Twilio earnings report due after Tuesday’s close.
The conundrum: Twilio has yet to trade based on any semblance of “value.” It has been and continues to be driven by a perception of potential, and that perception is altered on a pretty regular basis. Hence the big swings in just a few short months.
The good news is, Tuesday’s Q4 earnings report will likely answer some of the question that investors have been asking about the company’s future.
The bad news is, owners of Twilio stock may not like those answers.
Twilio Q4 Earnings Preview
Twilio, for those not familiar with it, has turned cloud computing technologies into a robust telephony and messaging tool. Anything an individual business could want to do with, or through, a smartphone or app, TWLO can make it happen securely, en masse, via the cloud.
It’s a relatively young company, too. Twilio has only been in business since 2013, and a publicly traded company since the middle of last year.
Revenue growth hasn’t been a problem at any point, though. For the quarter ending in September, the top line of $71.5 million was up 61% on a year-over-year basis, and estimates for a top line of $74.2 million are 44% better than Q4 2015’s sales.
What has been a sore spot, though, is earnings — or a lack thereof. Twilio isn’t profitable, and isn’t expected to be anytime soon. Analysts anticipate a loss of 5 cents per share on Tuesday, though that would be a slight improvement on the 10-cent loss booked in the same quarter a year earlier.
3 Things TWLO Stock Holders Need to Chew On
Clearly Twilio stock is still a story stock, rocked more by rhetoric and assumption than by actual results. Results — relative results — will set the tone for the rhetoric, though, and that rhetoric will largely be shaped by three overarching ideas.
In no particular order …
An ‘Even If’ Valuation: The market is mostly OK with the lack of earnings thus far, and the unlikelihood of a swing to a profit in the foreseeable future. As was noted, the story aspect of this company has been more than compelling enough to keep trades interested.
They’re becoming increasingly suspicious, however, that even if Twilio were to turn a typical 10% profit on its revenue, the valuation still makes no sense. At its current annual revenue run rate of $290 million, $29 million worth of income still doesn’t make sense of the company’s current market cap of $2.8 billion.
Its Relationship With Facebook: The Twilio platform integrates (quite nicely) with Messenger and WhatsApp, from Facebook Inc (NASDAQ:FB), which accounts for roughly a fourth of the company’s revenue now that Messenger was added to the mix last year. But that’s not guaranteed revenue going forward.
As Pacific Crest Securities analyst Brendan Barnicle observed following the Q2 Twilio earnings report:
“Variable revenue ($8.1 million) was down 14% sequentially and dropped to 12.6% of revenue from 16%. While some investors may worry about the decline, we believe that it largely reflects the lumpiness of revenue from WhatsApp, Twilio’s largest customer and the main component of variable revenue.”
Slowing Growth/Outlook: As was noted, traders had been willing to pay a premium for TWLO stock because its red-hot growth rate presumably would catch up with the stock’s valuation, and even spur a profit. The anticipated top line for its fourth quarter is barely better than its Q3 revenue, and even analysts that expect a top-line beat aren’t looking for a big one — only about $3 million.
To that end, Twilio needs to serve up some plausible Q1 and full-year (2017) revenue guidance that’s better than the current figures of $77.85 million and $352.6 million, respectively.
Bottom Line for Twilio Stock
Though TWLO shares may finally look like they’re on the mend after paying the usual post-IPO price — a major setback — between September and December, it’s still a bit too soon to make such an assumption. The rally since early January may still be nothing more than a relief rally in the wake of a major inflow of new TWLO stock that had been tied up until December 22nd.
The pressure remains on the company to prove its worth. Tuesday’s report will either do so, or it won’t, and it looks to be a 50/50 proposition at this time.
Look for fireworks either way.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.