Cloud communications provider Twilio (NASDAQ:TWLO) had an unbelievable 2018, as TWLO stock price rose 278%. In fact, of 3,400 stocks with a market cap over $300 million, Twilio stock was the sixth–best performer for the year. (Tandem Diabetes Care (NASDAQ:TNDM), which soared some 1,500%, was the biggest winner.)
The gains were deserved. Twilio delivered a series of blowout earnings reports in 2018. And heading into 2018, Twilio stock looked too cheap. In fact, I highlighted it last year as a 2017 loser that was set to be a 2018 winner.
Obviously, I didn’t expect a 278% gain. And, at this point, I question just how much more upside TWLO stock has. Its outlook admittedly is still intact, and of course its performance has been impressive. And Twilio stock has dipped multiple times during the rough market of the last three months, and it has rallied each time.
But as a stock that’s priced close to perfection, TWLO seems to face risk from any further weakness in the broad market,. And if sentiment towards stocks improves, other high-growth plays look cheaper and are potentially better buys. Twilio’s story isn’t over, but at this point, it seems wise to take the profits earned from TWLO stock.
The Case for Twilio Stock
Growth is the core of the bull case for TWLO stock. Twilio’s growth is explosive: it expects its revenue to jump 58% this year, up from a 44% increase in 2017.
Its bottom line is a bit less impressive: the company is guiding for adjusted earnings per share this year of just 10 cents-11 cents, implying a stunning price-earnings multiple of about 800. But TWLO’s leverage will rise, and PaaS (platform-as-a-service) companies like Twilio generate lower upfront earnings and “sticky” profits over the longer term.
And Twilio’s revenue should grow for years to come. The company’s communications platform is embedded in Uber, Facebook’s (NASDAQ:FB) WhatsApp, and many others. A partnership with Amazon.com’s (NASDAQ:AMZN) cloud business allows Twilio to piggyback on the explosive growth of that unit. Finally, Twilio’s acquisition of SendGrid (NYSE:SEND) gave it another growth catalyst.
Those are the type of positive catalysts that investors have loved the past few years. And as Twilio has recovered from the loss of some of its Uber business back in 2017, investors fell back in love with TWLO.
The Two Big Risks
But, as noted above, TWLO stock has nearly quadrupled in a year. And in this market, investors clearly are questioning stocks’ valuation. Meanwhile, Twilio stock trades at nearly 14 times its revenue, even after excluding its net cash and investments.
That’s one of the biggest multiples in the market at this point. And even analysts who were bullish on TWLO stock last year as it skyrocketed don’t see that much upside for TWLO stock now. The average target price for Twiio stock is a bit over $93, suggesting less than 5% upside. If the multiples of TWLO stock don’t expand, TWLO will have to generate similar growth in 2019 as it did in 2018, against much tougher prior-year comparisons.
That leads to the second risk for TWLO: there’s basically no room for error. In Twilio’s “worst” quarter out of its last four (its Q2 report), the company still beat the consensus revenue growth outlook by 15 percentage points. Investors’ expectations are going to be high; a company whose stock is trading at 14 times its sales not only can’t miss consensus estimates, it needs to keep crushing estimates to keep investors’ optimism intact. A single quarter that’s only “good” instead of “great” – let alone the loss of another customer – could send TWLO stock tumbling.
Better Options Than TWLO Stock?
Twilio may be able to support its valuation. A stronger market in 2019, particularly in tech, would help. And the revenue multiples of Twilio stock will come down quickly as Twilio continues to grow.
But there’s a catch: if investors are willing to pay up for Twilio stock, they’ll likely be willing to do the same for other growth plays. And there are a number of intriguing options out there that have dropped sharply over the past three months.
Veeva Systems (NYSE:VEEV) has pulled back about 18%. Square (NYSE:SQ) has lost 44%, and Shopify (NYSE:SHOP) has retreated 22%. The strength of the bull cases on those stocks varies. But those stocks are all likely to rise if investors become more upbeat about tech. And bigger selloffs likely will eventually lead to bigger rebounds.
Obviously, few investors are expecting TWLO stock to rise another 278% in 2019. And it’s possible Twilio will have another good year in 2019. But if it does, other growth stocks might perform better. If it doesn’t, it’s “look out below” for Twilio stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
