Following earnings, shares of Twilio (NYSE:TWLO) may look expensive by some metrics. At the same time, the TWLO stock chart suggests wagering on a low-cost vertical is quite reasonable. Let me explain.
Not everyone is a buyer of TWLO stock after the outfit blasted Street views last week. InvestorPlace’s Luke Lango is one who’s concerned based on his estimates for the cloud specialist’s growth prospects versus its current and steep valuation. In fact, Luke makes the case shares are overvalued by as much as 50%. But most investors are buyers.
Twilio’s second-quarter report featured a surprise profit, continued strong and better-than-forecast sales growth and a solid outlook. And for their part, investors took that information and collectively rocketed TWLO stock to new highs. Further, the price action wasn’t driven by bearish short covering as that figure has continued to shrink to about 7.5% of Twilio’s float.
Net, net, some well-intentioned financial modeling may point to TWLO stock being on shaky ground today. But if history is any indicator, discounting a trend in motion at this stage in the game could be even less stable, and a costly call. And that’s not just me or CNBC’s James Cramer talking. There’s also the TWLO stock chart that’s speaking volumes, and worth listening too.
TWLO Stock Weekly Chart
Last week’s earnings-driven price gap hurled TWLO stock through its all-time-highs on solid volume and out of a deep corrective cup-shaped base nearing two years in duration. Looking ahead, Twilio certainly isn’t immune to pulling back. But any profit-taking is expected to be well-supported by the former high and ultimately for continued upside momentum.
Bottom line, at this stage of the growth cycle, bullish trend persistence is much more likely the theme of the day, as well as for the weeks and months ahead in TWLO stock.
TWLO Stock Long Bull Call Spread Strategy
Very similar to the last time I discussed TWLO stock following its “overbought” earnings reaction in May, I’m favoring an out-of-the-money bull call spread. Verticals like this are a great way to have long exposure while greatly reducing and fully-limiting an investor’s risk to shares.
Reviewing TWLO stock’s calls, one vertical that looks attractive is the Sep $80/$85 call spread. With shares at $77.49 the spread is priced for $1.65 or roughly the equivalent of around 2% of Twilio’s current market price.
Given Twilio’s volatile nature and in the event our bullish technical outlook fails to see the light of day, the protection offered by this vertical is certainly a nice feature. But if the forecast pans out, $3.35 above $85 at expiration wouldn’t be a stretch to reach … and amid likely increased calls from others, TWLO is even more overvalued.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.