As we head into the last day of trading for 2019, Twilio (NYSE:TWLO) stock has fallen almost 35% from its summer high. The cloud communications software platform company is still in turnaround mode, and it still is not producing free cash flow.
Twilio provides a text messaging platform for companies to communicate with their customers. The messages are secure and provide a direct link on a mass scale for businesses.
Bottom line: TWLO has a $13 billion market value with almost no profits, no free cash flow and decelerating revenue growth. At a minimum, there is no margin of safety in the Twilio stock market value.
Recent Earnings Release Provides No Hope
For the nine months ending Sep. 30 Twilio’s free cash flow was negative $14 million including capitalized software development costs.
That is astounding, given that Twilio produced $803.2 million in revenue during the same period.
When I see those kinds of numbers, I sometimes think, you know what? Let me be the CEO or CFO of the company. I could figure out a way to get the company to positive cash flow. Literally, how hard could it be?
Granted, Twilio might be losing some key customers. There are reports that WhatsApp is scaling back usage of the Twilio app for its customers.
TWLO Outlook Not Much Better
Twilio’s outlook guidance was for a non-GAAP loss from operations of $5 million to $6 million in Q4. And it expects a full-year non-GAAP loss of $4 million to $5 million. Where is the hope in that for holders of Twilio stock?
But then, for some reason, Twilio made a mistake in its earnings per share forecast. Originally they indicated that EPS for 2019 would be between 16 and 17 cents per share. But they had to make a correction, moving the range down to 12 to 13 cents per share.
But does it matter? Twilio stock trades around $98 per share. That puts TWLO stock on forward price-to-earnings ratio of over 300 times. That is beyond overvalued. There is no margin of safety at that kind of price.
What Should Investors Do With Twilio Stock?
This is a stock that is valued so high that management basically doesn’t care what happens to the price. That is more or less what they told Cramer in a recent CNBC interview.
They are going to focus on the “long-term.” Well, in the long-term, we are all dead, said the famous economist, John Maynard Keynes.
Maybe they should focus on profitability to help investors understand the present valuation of Twilio stock. Here’s one reason this would be a good idea: Short interest in TWLO stock is over 15% right now. Any more hiccups, including missed expectations, and short sellers will pounce further.
In the end, that makes it harder to raise capital, and maybe even convince new large customers that your company is a growth story, which is where it’s all at in the space.
Moreover, it makes new investors, other than the original IPO investors, upset. Their expectations of growth and earnings for the company may not come to pass. They may lose patience and derate the valuation of the company.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.