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Twilio Stock Is Heading from Priced-to-Perfection to Overheated

Twilio stock could get crushed by an earnings miss

When Twilio (NYSE:TWLO) came public in the summer of 2016, the shares pulled off an impressive rally. Twilio stock seemed invincible by October, Forbes.com had the CEO and co-founder, Jeff Lawson, on the front cover of the magazine. The headline: “The World’s Sexiest Stock.”

Despite market noise, Twilio stock remains fundamentally viable

Well, this turned out to be more of a curse. TWLO stock would soon get cut in half. Even worse, the shares would trade in a range until early 2018.

Keep in mind that the company had to deal with some tough problems, such with customer concentration as well as signs that Uber (NYSE:UBER) was looking for alternatives. But despite all this, TWLO was able to manage through this.

And yes, there would be another bull move. From late 2017 to now, Twilio stock has soared from $24 to $144.

A Closer Look at Twilio Stock

OK then, what now? Can the rally continue? Well, when it comes to cloud companies nowadays, the environment is close to nirvana. We’ve seen hugely successful IPOs in the space, such as from Zoom Video Communications (NASDAQ:ZM) and Crowdstrike (NASDAQ:CRWD). Even more mature cloud companies have been solid performers. Just look at Adobe (NASDAQ:ADBE) and Salesforce.com (NYSE:CRM).

But as for Twilio stock, it’s strong returns have been more than just about being part of the crowd. The company does have a powerful set of technologies. Consider that telecommunications systems are extremely complicated – say to dial up a number and have a high-quality call or even send a text.

Yet over the years, Twilio has built a sophisticated platform that makes it easy to implement communications within apps by using APIs or low-code approaches. This is backed up by an advanced infrastructure that includes a network of 28 cloud centers across the globe.

In terms of adoption, there were 154,797 active customer accounts in the first quarter, up from 53,985 on a year-over-year basis. They range from small operators to large enterprises like Nordstrom (NYSE:JWN) and eBay (NASDAQ:EBAY).

Twilio also has deep penetration within the global developer community, which is definitely a major competitive advantage. The registered users are at roughly 5 million.

The business model has been another driver for Twilio stock. It’s based on a usage approach similar to Amazon.com’s (NASDAQ:AMZN) AWS platform, not subscriptions. This has two key advantages: there is low risk to get started and there is less likely of overpaying when the service is expanded throughout the organization.

And finally, TWLO continues to leverage its technologies into new markets. Perhaps the most important is contact centers (through a product called Flex). Here’s how Twilio describes it:

“Twilio Flex delivers the first instantly deployable cloud-based platform that allows businesses to programmatically customize every element of their contact center experience — from the core infrastructure to the user interface.”

Bottom Line on Twilio Stock

During the latest quarter, TWLO posted revenue growth of a sizzling 81% to $233 million. This compared to 68% in Q3 and 77% in Q4.

But keeping this up momentum will not be easy. Note that a key factor in the recent growth came from its $3 billion acquisition of SendGrid.

Besides, the valuation on TWLO stock is at nose-bleed levels, with the price-to-sales ratio at 25X. Even within the cloud segment, this is pretty steep.

For the most part, TWLO stock is really priced for perfection. And as we’ve seen with some other cloud companies, like Zuora (NYSE:ZUO) and Cloudera (NYSE:CLDR), a miss on Wall Street expectations can severely deflate the stock price. In other words, for those looking at TWLO stock right now, it’s probably a good idea to be cautious.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/06/twilio-stock-overheated-perfection/.

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