Coming into 2020, cloud adoption clearly was in the middle of a multi-year acceleration. Twilio (NYSE:TWLO) stock was one of the clear beneficiaries.
Amid the panicked market sell-off in March, however, investors seemed to forget about that long-term tailwind. TWLO stock lost almost half its value in a matter of weeks. Many other cloud names sold off as well.
What we’ve seen since then is what I’ve called a “second wave” of pandemic-driven buying. Investors in March only were buying obvious winners. Protective equipment manufacturers spiked. Multiple vaccine and treatment plays rallied. Zoom Video Communications (NASDAQ:ZM) soared. So did online pet supplier Chewy (NYSE:CHWY).
But as investors regained their senses, they started looking toward mid-term winners. That second wave unsurprisingly has boosted a number of cloud names — including Twilio, whose stock has nearly tripled from March lows. A blowout, and profitable, first quarter report last month was a key driver: TWLO stock gained 40% on the release and kept climbing.
The optimism so far makes sense. This is a great business. But after the rally, I still think investors are best off hoping for a dip before entering.
An Attractive Business
Again, cloud growth was a major market story at the beginning of this year. It’s one of the key trends that will underpin what I’ve predicted will be the “Roaring 2020s.”
That trend will make Twilio a winner. It’s the leader in cloud communications across all channels. Twilio is a key part of the platforms at Uber (NYSE:UBER), Lyft (NASDAQ:LYFT), Airbnb, and many more.
The 2018 acquisition of SendGrid added e-mail capabilities. After that deal, Twilio projected a total addressable market of some $66 billion.
Meanwhile, trailing twelve-month revenue is just $1.3 billion. In other words, Twilio has penetrated, at least by its estimates, about 2% of its potential market.
That leaves an extremely long runway for growth. And while TWLO stock isn’t cheap, or close, that runway seems long enough for the company to grow into what looks like an aggressive valuation.
The Cloud Question
It’s worth noting that the valuation has become much more aggressive in a matter of months. The bounce from March lows isn’t necessarily the issue. Many stocks have risen 100%-plus over that stretch. Investors simply sold far too many quality names during the panic.
The issue, rather, is that TWLO stock has doubled so far this year. Certainly, the blowout Q1 report is one reason why. But broader cloud optimism is another key factor.
Indeed, an investor need only look at the best large-cap stocks so far this year. Twilio stock is the 7th-best performer out of over 700 such names. But the biggest 2020 winners, with only a few exceptions, are either pandemic winners — ZM, CHWY, Teladoc Health (NYSE:TDOC), Moderna (NASDAQ:MRNA) — or cloud names.
The pandemic is going to have a longer-term impact. E-commerce adoption has accelerated. Remote work isn’t going to end when normalcy returns. The cloud underpins those trends.
Again, we knew coming into 2020 that cloud services were going to grow for years to come. They may grow faster now. To some extent, Twilio is simply pulling forward revenue it was going to generate anyway.
That matters for valuation. I’m not convinced it matters quite enough to suggest Twilio is worth double what it was six months ago.
TWLO Stock on the Dip
To be sure, I am not recommending that investors short TWLO stock. I wouldn’t even necessarily argue that investors fortunate enough to own the name now need to head for the exit.
Twilio is a hugely attractive business. It’s growing like gangbusters. And it’s well ahead of its competition. That combination created a lot of winners in the bull market, and many more in the rebound since March.
But I do wonder whether the rally has gone a bit too far. Indeed, TWLO has faded a bit from last month’s highs. It’s moved mostly sideways since finishing its multi-session post-earnings spike.
As I’ve noted before, we’ve seen Twilio stock tumble in a hurry in the past. It dropped 40% between July and November of last year. Shares plummeted back in 2017 when Uber pulled back on its business. Peak to trough TWLO stock dropped over 60%.
Those declines obviously proved to be buying opportunities. I expect the next dip will be as well. But for investors on the sidelines, after a monster rally year-to-date it’s probably worth waiting for that next dip.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
