Unsurprisingly, all anyone can talk about on Wall Street is the coronavirus from China. As a result, high-growth names like Twilio (NYSE:TWLO) tumbled badly over the last few days. Sure, the midweek session wasn’t too bad for TWLO stock. Given the worsening situation with the outbreak, though, I think only a brave contrarian would risk buying now.
Of course, the shame of this whole matter is that TWLO stock was making great progress before the coronavirus spoiled the party. For one thing, shares received a very nice January bump. As you know, Twilio is a cloud communications platform as a service (CPaaS) specialist. Its service runs deep through the Internet of Things and will only get more relevant years down the line.
Furthermore, the company delivered solid results for its fourth quarter of 2019 earnings report. Released in early February, covering analysts expected earnings per share to hit 1 cent and generated revenue of $313 million. Instead, Twilio delivered adjusted EPS of 4 cents, which was the same from the year-ago period. For top-line sales, it rang up $331 million, a 62% year-over-year increase.
Shortly after the report, TWLO stock printed red ink due to disappointing profitability forecasts. However, Wall Street quickly brought shares back up over the subsequent days. Essentially, the message was that Twilio is focusing more on growth opportunities. For instance, the company has expanded into business communications software. Also, TWLO is further developing communications tools for IoT devices.
Likely, these developments were enough to convince investors to give a pass to TWLO stock despite the profitability disappointment. Unfortunately, the coronavirus has taken the air out of risk-on growth names like Twilio.
Coronavirus Trumps TWLO Stock
Now, before anyone gets any ideas about buying into the “discount” right now, consider the bigger picture. As I mentioned, Twilio is a growth stock. At the core, that means it eschews profitability and stability for expansionary strategies. This stance often facilitates incredible gains, but there’s a catch: a bearish cycle or a black swan event could deflate shares painfully.
If you look at the company’s financials, it’s clearly based on the assumption of a robust bull market. With rising debt, negative net income and free cash flow in the red, Twilio isn’t exactly a paragon of stability. As several countries hunker down to address and contain the coronavirus, the overall environment doesn’t support TWLO stock.
To be fair, President Trump recently announced that the risk of a coronavirus outbreak in the U.S. “is very low.” Furthermore, he stressed that our nation is “very, very ready for this.”
I’m not trying to scare anyone nor am I recommending panic. Still, I believe that Trump is very, very wrong.
Simply, we don’t know enough about the coronavirus to make such strong pronouncements. Though the President shouldn’t incite panic, he shouldn’t give a false sense of security. For example, we have evidence that the coronavirus can transmit asymptomatically. That adds a horrendous variability to the crisis. Imagine being stranded in the ocean knowing there are sharks but not knowing when they’re going to strike.
More worrisome, asymptomatic transmissions have likely occurred. Germany’s health minister warned that new coronavirus cases in that country cannot be traced. Possibly, this suggests that the virus transmitted within Germany.
Finally, Brazil recorded its first case of the virus after a man who was in Italy recently reported symptoms. Thus, an outbreak in the U.S. is a matter of when not if.
No Mood for Risk
Let’s briefly discuss the other side of the argument. Some folks have urged us to put the coronavirus into context. Specifically, the flu has infected and killed many more people just in the U.S. than the coronavirus has in total.
If the coronavirus is not as deadly and contagious as we currently think it is, then TWLO stock is a great buying opportunity. And let me just say that over time, I think we will see such a moment. But that time is probably not now.
We must remember that international government agencies aren’t just anxious about the potential for casualties. Rather, they must invest critical resources for a defensive and consumptive behavior. What I mean is that once countries spend money on combating the coronavirus, that’s it: we have nothing to show for it economically.
But without the virus, those funds could have been invested in accretive endeavors. So, this outbreak represents a global opportunity cost. And in this time of collective hunkering down, the bullish thesis for TWLO stock is incredibly vulnerable.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
