Talk about a leaving, breathing contradiction! Twilio Inc (NYSE:TWLO) may be a Wall Street favorite (albeit a speculative one) in light of some recent analyst chatter. With TWLO stock within reach of record lows though (and still edging lower) it’s pretty clear the ‘average-Joe’ investor and even most institutional investors aren’t buying into the optimism.
What gives? Why isn’t the market as a whole on board with the Johnny-come-lately bulls? The most logical answer is also the correct one. That is, even the most inexperienced of investors knows there’s more hype than hope packed into the recent TWLO news headlines.
And there’s one overarching concern.
Investors Less Impressed Than Analysts
It was KeyBanc Capital Markets analyst Brent Bracelin that tried to get the bullish ball rolling again early this month, not with an outright upgrade of TWLO stock, but at least an acknowledgement that Twilio’s ever-growing losses may finally turn the corner during the first half of 2018.
Bracelin is hardly alone in his optimism though. JPMorgan added TWLO stock to a list of names that also includes Facebook, Inc. (NASDAQ:FB) and Workday Inc (NASDAQ:WDAY) as the top prospects for capitalizing on the advent of artificial intelligence.
Throw in the fact that the analyst community now collectively says TWLO stock is worth $37.46 versus its present value of $24.44, and superficially it’s tough to understand exactly what’s holding the stock back.
Thing is, to veteran investors who’ve been around the block a couple of times and have the gray hair to show for it, it’s not difficult to understand at all. This is an analyst community that’s hoping Twilio turns out to be the next Facebook or Amazon.com, Inc. (NASDAQ:AMZN) so that can say they picked it.
Ditto for a handful of amateur investors who’ve stuck with TWLO stock through its 62% slide from its September-2016 highs.
Most investors know, however, that’s just not apt to happen.
The Fatal Flaw
Kudos to Twilio for creating a cloud-based communications solution many people didn’t think was actually possible. The company handles a lot of the back-end stuff Uber needs to manage (and automate) its rider pickups, for instance, and though Twilio lost some of that business recently, there’s no denying it did a fairly nice job as the middleman.
To that end, The Motley Fool’s Leo Sun recently and accurately pegged Twilio as the “best of breed” in the business. Being the best of a breed, however, may not be enough. And it’s certainly far from a guarantee that Twilio will be able fend off competitors… especially considering there’s no moat for its business.
One only has to look at recently-IPO’d Bandwidth Inc (NASDAQ:BAND) to find evidence of this nagging reality. It more or less does what Twilio does. It’s just been doing it for a lot less time. That lack of history hasn’t prevented Bandwidth from also securing Microsoft and Amazon.com as paying customers though.
In the meantime, Zendesk Inc (NYSE:ZEN) and RingCentral Inc (NYSE:RNG) continue to nip at Twilio’s heels, and calling a spade a spade, if Amazon or Microsoft got the urge, they could ultimately do for themselves what they’ve hired Twilio to do for the time being.
That’s the long way of saying what started out as a growth business is quickly becoming a commodity, yet TWLO stock has to-date been treated like a growth stock. An adjustment has to be made.
Moreover, as cloud-based telecom services becomes more commodity-like, the expected swing to profitability for late 2019 comes into question.
Bottom Line for TWLO Stock
It’s a conundrum to be sure. Do you trust what analysts are collectively saying? Or do you trust the crowd, which is essentially saying through the stock’s weakness that Twilio isn’t going to be allowed what it though it would be able to become?
The knee-jerk answer to the rhetorical question would be “trust the analysts” for most stocks. This time around, however, feels quite different. This is the same analyst crowd that’s largely missed much of the recent rally, overestimated names like General Electric Company (NYSE:GE) and underestimated Wal-Mart Stores Inc (NYSE:WMT).
More than a small handful of these professional stock-pickers are now getting a bit aggressive just to restore credibility, hoping the hype train lifts a story stock like Twilio. The fundamentals certainly aren’t going to do the job anytime soon, if ever.
Never say never, but when a trading crowd that watches a name like Twilio closely doesn’t see a bright future for TWLO stock, then there’s probably not a bright future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.