The last redoubt of the bull market, the cloud service stocks, was taken Nov. 19 as Twilio (NASDAQ:TWLO) fell 15% despite an absence of news. Twilio stock has been on fire in 2018, and even with the hard fall of $12.27 in intraday trading, and another $1.72 drop overnight, it was still due to open nearly three times higher than the $25.78 price it fetched at the start of the year.
The rout of Twilio stock on Nov. 19 was joined by other cloud stocks and the First Trust Cloud Computing ETF (NYSEARCA:SKYY), which fell 3.53%.
I called this a bear market, although analysts will wait until stocks have already fallen 20% to acknowledge that.
Gains and Twilio Stock
From a business standpoint, Twilio is fine. The company has built a cash and investments hoard of almost $750 million, according to its recent quarterly report, released Nov.6 for the three months ending in September.
Revenue for the quarter was up 68% year over year, to almost $169 million, the company estimating it will bring in $630 million for the full year, with December quarter revenue at around $184 million, and non-GAAP net income of 3-4 cents per share.
Twilio shares had surged on this news hitting a high of over $96 per share, and the recent fall still leaves it $4 per share higher than it was before those earnings were released.
The problem is no one is willing to pay over 10 times revenue for just about anything. Twilio’s market cap of about $7.5 billion entering trade November 20 suddenly looks expensive.
Twilio offers developers a set of Application Program Interfaces (APIs) that let them embed communications into other applications. It calls this a “programmable communications cloud.” The company went public in June 2016, with an IPO priced at $16 per share that promptly zoomed to $28.79.
When Does it Turn?
When market psychology collapses, calling a precise turn is impossible. What is certain is that decisions taken during a company’s rise are now going to be questioned.
Twilio, for example, bought Sendgrid (NASDAQ:SEND) a month ago for $2 billion, which promptly beat its own expectations for earnings and revenue. Sendgrid will probably open for trade Nov. 20 little changed from where it was before the all-stock deal was announced.
Cynics will point out that as the stock falls its revenue is highly dependent on two customers, Uber and the WhatsApp app from Facebook (NASDAQ:FB). In fact, 2019 should be a good year for the company, as its market of Communications Platform as a Service (CPaaS) continues to mature.
The Bottom Line on Twilio Stock
It’s hard to see smaller companies like Twilio trading much higher as long as cloud czars like Amazon.Com (NASDAQ:AMZN) continue to crash. Amazon has now fallen over 25% from its $2,000 per share high and was due to open for trade on Nov. 20 below $1,500.
Given that reality, expect more days like yesterday for companies like Twilio. The reaction against tech is concentrated in the cloud, which is the market that Twilio serves. Its niche of email marketing is in especially bad odor right now, as consumers become obsessed with privacy and call upon government to “do something” about it.
Twilio hasn’t done anything wrong. Perhaps even its customers haven’t done anything wrong. But when the wind reverses, especially in technology, right begins to look wrong, smart looks dumb, and babies get tossed out with the bathwater.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now 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.
