Twilio (NYSE:TWLO) has been the star on Wall Street for the past few months. Its stock could do no wrong … until last night. Management reported a strong fourth quarter, but the stock has falling over 5% today on the earnings headline.
TWLO beat sales expectation with very strong 77% year-over-year growth. They also managed to meet bottom line expectations. This is what growth companies are supposed to do. Their goal is to grow the top line while managing their spending. They also guided forward with caution, which is likely where the bulls are slightly disappointed.
The street expectations did not include the acquisition of email API platform Sendgrid.
Luckily, coming into the earnings event TWLO stock was up 30% year-to-date and and an astonishing 336% in one year. I guess you could say that it was priced for perfection. That is a lot of hope to live up to, so a small dip doesn’t change the trajectory yet.
Where Does Twilio Stock Stand Now?
Fundamentally Twilio stock is expensive from the traditional price-to-earnings ratio perspective as compared to, say, Facebook (NASDAQ:FB). But this is not a traditional stock. When I evaluate a growth company, I don’t worry about value. I need them to grow as fast as they can, and this cannot happen if they are penny-pinching. Since they met the earnings expectations, it tells me that expenses are going according to plans.
Having said that and after a rally this big, an earnings dip on disappointment is not likely to be a one-day event. At these altitudes, I could find better entry points. But this is a momentum stock and those rarely give investors a clear signal to trade.
Luckily we can use the charts to predict areas of interest for the TWLO stock. If this selloff continues, the first obvious level of interest is at $113 per share. This has been the February pivot point. Below lies the $108.60 which is the low of the period. Either of these levels can be support on this dip. I look for signs of stabilization there, and I can re-enter long on clear upticks.
If the sellers persist then the obvious next target is the candle from Jan. 31. It spans all the way to $104 per share. This is where I would expect better potential support. This is the start of a prior pivot zone all the way to $98 per share. The point of control for the last three months or so is even lower and closer to $92 per share. This was the spot where both bulls and bears fought the hardest, so will be best support.
The strategy is the same on any of those levels and conviction grows stronger the lower it goes. Before I catch the falling knife I need to see the support level hold. Then the bulls will need to set a higher low trend before I brave it long, because this dip is miniature relative to the ascent that TWLO has had. Any long attempt should have a tight stop loss. Unless I plan on holding this stock for years, I don’t want to turn a trade into an investment.
Wall Street Analysts are unanimously one sided rating Twilio stock as a “buy.” And it is now trading at the very top end of their price range. So this leaves it open for an opinion flip, much like what happened to Nvidia (NASDAQ:NVDA) when it reached its height of exuberance. When a stock runs this fast and high on such one-sided opinion, it becomes vulnerable for big corrections. Tight stops are in order for any bullish bets on TWO.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
