Before you read the following, let me make something clear — don’t misread the message. Just because Twilio (NYSE:TWLO) is ridiculously, stupidly overvalued doesn’t mean Twilio stock can’t continue to rally. It is what it is.
On the other hand, there comes a point in time when every publicly traded entity has to justify its stock’s price. Twilio can’t — and won’t be able to anytime soon anywhere near its current value. The only question is, when and where will most traders stop and ask “what’s the end-game?”
Warning: You may not like the answer. The good news is, the answer may not be relevant for a long, long time.
Number-Crunching
I get it. Believe me, I get it. Twilio is a story stock, and story stocks don’t trade like regular stocks do. They trade based on potential. Amazon.com (NASDAQ:AMZN) is the quintessential example of a story stock, paying off in a big way for investors who could see years down the road.
Let’s be honest, though. Amazon is the exception to the norm rather than the norm. For every Amazon, there are four or five companies like Pets.com, Webvan, Flooz, and DrKoop.com. They were all just as touted as Amazon.com at the time, but ended up going nowhere.
Still, let’s just assume Twilio ends up surviving and tweaking itself long enough to make it. Then what?
Just to put things in perspective, Twilio is a $15.5 billion company that’s generated $650 million worth of revenue over the course of the past four reported quarters. To its credit, last year’s top line was 63% better than 2017’s, and the pros are calling for similar sales growth this year.
Not bad. Not bad at all.
But even if Twilio ends up pulling in the $1.08 billion in sales analysts are modeling for the year now underway, Twilio stock is still trading at about 15 times sales.
That compares unfavorably to its tech peers. Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) presently trades at about 6.1 times its trailing revenue. The aforementioned Amazon is valued at a price/sales ratio of 3.5.
Given those comparisons, TWLO stock is arguably valued three times as much as it should be. Or, to approach the matter from a forward-looking perspective, Twilio would need to triple its revenue to be priced on par with its cloud-minded peers.
And earnings? It’s not even entirely fair to use profits as a yardstick to measure Twilio stock. It’s a startup, spending heavily to develop a machine that can attract and keep customers. But it’s at least a starting point from which to make a bigger-picture call.
Last year, Twilio posted a per-share profit of 11 cents. Analysts are only modeling earnings of 10 cents per share for Twilio stock this year, but given a handful of topped estimates in its recent history, that might be too pessimistic. Let’s say 20 cents per share is a more plausible figure. That translates into a forward-looking P/E ratio of 634.
That’s not even in the same realm as more developed rivals. Alphabet shares are priced at 21.9 times their projected income. Even the perpetually frothy AMZN stock is trading at only 42 times this year’s estimated profits.
Twilio needs to beef up its earnings by roughly 20 times this year’s outlook for the stock’s current price to make sense.
Bottom Line for Twilio Stock
Again, I get it. Anything’s possible. It’s happened before. The fundamentals — as I conceded — don’t even really matter for story stocks. Rhetoric alone could continue to fuel the incredible rally Twilio stock has dished out since late 2017.
Let’s be realistic, though. Now that Twilio and its direct rivals like RingCentral (NYSE:RNG) and Zendesk (NYSE:ZEN) have proven there’s a market in delegating customer service management and routing to the cloud, bigger and deeper-pocketed players are willing and able to compete. That makes the path to a tripling of revenue a tough one to traverse, while the path to a 2000% increase in profits could be even tougher to navigate.
Own TWLO stock if you must. But, let’s not kid ourselves about what such position really is. Even though the financial media and analysts are treating it like it’s a normal stock, it isn’t. It’s just a trade. Sooner or later it will have to justify its price — and it may struggle to do so.
That doesn’t mean it can’t be a fun train to ride between now and then, though.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
