Is Twilio Inc (TWLO) Stock Going to $15 or $30?

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Twilio Inc (NYSE:TWLO) went public on June 23, 2016. Priced at $15 per share, TWLO stock had a 92% first-day return. Almost a year later, if you held on to your IPO shares, you’d still be up 66.4% as of May 22.

Is Twilio Inc (TWLO) Stock Going to $15 or $30?

You can’t complain about this kind of return.

Many who did hang tight are probably regretting their decision given TWLO stock hit a 52-week high of $70.96 within its first 100 days as a public company. If you sold at the height last September, your 66.4% return would have been an astounding 373.1%, well over 1,000% on an annualized basis.

In March, I opined that Twilio had a beautiful future. I even picked TWLO stock over salesforce.com, inc. (NYSE:CRM), suggesting that if you valued Twilio shares on the same basis as CRM stock at the same point in development, TWLO stock was worth $37.50 per share — about 20% more than its March 9 closing price.

Well, the markets didn’t see it that way, knocking its stock down by 20%-plus over the next ten weeks of trading. At the same time, CRM stock is up 7%, which means either my assessment of Twilio’s value was way off, or new information has materialized that substantially alters the company’s growth story.

Is TWLO Stock Headed to $15

There’s a famous Canadian portfolio manager named Stephen Jarislowsky who believes that most IPOs can be bought 12-24 months after going public for less than their initial pricing. TWLO stock is indeed heading in that direction. What’s changed? InvestorPlace writer Tom Taulli has a pretty good idea.

Taulli recently discussed how Uber is developing its cloud-based communication systems as well as using alternative vendors for solutions generally farmed out to Twilio. Analysts nervously downgraded TWLO stock and investors fled, knocking 26.3% off its share price in May 3 trading.

Ouch.

The problem, according to Taulli, isn’t Uber’s move to distance itself from Twilio. Rather, this is just the beginning of a large defection by its customer base. If this is true, Twilio’s price-sales ratio of 7.4 goes right out the window. Like any business that relies on one or two large customers to drive revenue, Twilio now faces the prospect of life beyond Uber and that’s a big unknown.

Investors hate uncertainty.

Is TWLO Stock Headed to $30

It’s hard to imagine Twilio moving higher anytime soon given its guidance in early May for full-year 2017 revenues was as low as $356 million, $14 million less than analyst expectations.

However, there were a couple of kernels in its Q1 2017 earnings report that should make investors think twice about abandoning TWLO stock.

The first relates to the customer concentration problem. The Uber situation highlights its need to get away from relying on one or two significant customers for a big chunk of revenue. To that end, it added 4,000 customers in the first quarter, 43% more than in a typical three-month period. A few more quarters like this and investors will have forgotten what the fuss was all about.

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The second has to do with making money. Twilio didn’t at the moment, but was it to do so, even on a non-GAAP basis, that would rev up TWLO stock. In Q1 2017, analysts were expecting a 6 cents non-GAAP loss, but Twilio managed to deliver a non-GAAP loss two cents lower than anticipated.

For the entire 2017, Twilio’s outlook is for a non-GAAP loss of between 27 cents and 30 cents per share, in line with its non-GAAP operating margin in previous years.

“While we are seeing some changes in the relationship with our largest customer, our momentum across the business continues to be strong, with a 42% year over year growth in Active Customer Accounts and a 62% year over year growth in Base Revenue during the quarter,” said Twilio CEO Jeff Lawson during its Q1 2017 press release.

The biggest concern investors should have with Twilio is whether its products and services remain exclusive for most of its customers. Perhaps it was unrealistic to think the Uber’s of the world would remain so. Smaller companies should be easier to maintain exclusivity. As we move into the remainder of fiscal 2017, I’ll be keeping an eye on how well Twilio’s customer diversification initiative is progressing.

Bottom Line TWLO Stock

If you own TWLO stock and bought in the $30’s, I’d hang tight. If you don’t own Twilio stock, I’d wait to see if it drops some more.

So, is TWLO headed to $15 or $30? If I can only pick one, I’ll go with $30. I believe the Uber defection is a significant wake-up call for the company, but what doesn’t kill you only makes you stronger.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/is-twilio-inc-twlo-stock-going-to-15-or-30/.

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