Twilio Inc (NYSE:TWLO), which went public in June, is a Henry Higgins for apps. Just as Professor Higgins transformed Eliza Doolittle from a poverty-soaked wretch into a great beauty in Pygmalion, or My Fair Lady if you prefer the musical, so TWLO transforms Web apps from empty nothings to bright lights and dazzle. Twilio does this by giving them a voice, video and messaging platform, delivered as a service, through the cloud, offloading these functions as Amazon.com, Inc. (NASDAQ:AMZN) offloads the cloud itself.
The question for Twilio stock investors is, how many companies need this and how many can use this? Just how many Eliza Doolittle apps are there, and how fast can they be found?
When TWLO stock delivers its earnings on Feb. 7, we’ll have a clue, and most analysts don’t think they will like the answer. They expect revenue of just $73.92 million, and a loss of 5 to 6 cents per share, a narrow loss but no real growth, certainly nothing worth a market cap of $2.63 billion.
Twilio Stock Is a Battleground
The pessimism is borne out of how quickly the app business is consolidating around a few huge companies which, like Facebook Inc (NASDAQ:FB), have the size to deliver these functions on their own, and which don’t need to rent them.
This has made TWLO stock a battleground stock, subject to wild swings of fortune. After going public in June with a first trade at $21.30, Twilio stock rose to nearly $69 per share by late September before plunging to $26.50 in early January, opening for trade Feb. 3 at around $30.50.
It was “a frumpy New Year” in the words of InvestorPlace contributor Josh Enomoto. At $28 per share, he saw the downside risk as greater than the upside potential. InvestorPlace contributor Chris Tyler agrees, suggesting you don’t even nibble until TWLO stock tests its low of $23.66 and bounces off it. After all, you don’t want to buy another FireEye Inc (NASDAQ:FEYE).
Joseph Hargett is more bullish, saying buyers are lined up to buy once earnings come out. Facebook itself is at the center of his uncertainty. TWLO is part of Facebook Messenger, but it has no contract with Facebook, which can cancel its deal at any time. Hargett offers two ways to play the volatility with options.
Richard Saintvilus, by contrast, is a straight-on bull, saying Twilio stock could hit $40 with just a little patience. TWLO itself runs in the Amazon cloud, and should be able to access Amazon’s cloud customers, he writes, helping them deliver voice notifications and text messages, which enhance security, providing access management features at low cost.
TWLO Stock Dances With Wolves
My view is that Twilio stock is dancing with wolves, which makes it both more enticing and more dangerous. Proving your value to the wolf without the wherewithal to attract your own pack, after all, can quickly turn you into wolf food.
I suspect analysts are looking too much at TWLO’s next earnings report and not enough at its real business model, seeing it as a trade rather than an investment.
Twilio is in the business of having programmers find creative solutions for common app problems within the cloud and selling those solutions by subscription. It’s possible that Facebook may find another way around the secure sign-in problem, but TWLO CEO Jeff Lawson is building a shop that can find other problems and other solutions, then deliver them.
In other words, if you’re bullish on Twilio stock, you don’t just believe it can bring in revenue and profit from its current offerings, but that it can use its relationships to find problems and develop solutions that go beyond disaster response and helping users get back their passwords. To return to the beginning of this piece, you believe Eliza will marry Professor Higgins and find a happy ending.
TWLO stock is a bet on cloud application development and on the model of selling solutions through the cloud, using the cloud’s own self-service model. It’s a bet Facebook and Amazon themselves are willing to make, one that has a longer time horizon than just next week.
I think a longer-term investor should be willing to play it that way, too. If you’re betting on Twilio stock, you’re betting on Jeff Lawson’s development vision. TWLO stock is about the jockey, not the horse.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN and FB.
