Twilio (NYSE:TWLO) has been a darling among investors and you can’t blame them. It’s rare to see a stock rally 200% in a few weeks, create a giant $30 gap in the chart, and still show no sign of weakness.
TWLO stock has no imminent risk or bearish triggers to speak of, even this close to its all time highs. So far, TWLO is one of the clearest superstars in 2020, up almost 100% year-to-date.
That’s 7.5 times better than the NASDAQ and Apple (NASDAQ:AAPL). Quarantine definitely didn’t hurt the outlook for Twilio.
The easy statement here is that if you aren’t already long TWLO stock, you shouldn’t be rushing to start buying now. Of course, whenever I make such a statement, I have to follow it up with the question of time frame.
Investors have different time frames and those focused on longterm goals shouldn’t concern themselves with a few dollars difference from current prices. But the discussion today has a slightly shorter term focus, considering how the rest of 2020 will unfold.
TWLO Stock Success is Earned
Stocks as successful as Twilio quickly become vulnerable to sharp corrections. It’s easy to see this risk on the stock chart’s long extension up and out. It wouldn’t take much for it to come toppling down at the first hiccup.
But that doesn’t break the bullish thesis for TWLO stock. These corrections are part of normal, necessary price action, else the whole rally would be a house of cards.
This is a tech company serving a world that just realized that it quickly needs to get digitized and right away. The future looks bright from its own fundamentals but extrinsic factors can come into play and hurt the stock nonetheless. Overall sentiment can flip on a dime just look at the last few months. If it happens again Twilio bulls will suffer regardless of how good is the individual story.
Case in point, I wrote a similar story in May 2019 after the stock popped on earnings. My message was the same: wait for a pullback for a better base. This was exactly what happened, as the stock fell 35% after that pop. Patience paid off.
Twilio Isn’t Cheap But That’s Okay
Valuation clearly is out of whack. The stock loses $2 per share and the stock price is 23 times its total sales. From that perspective it is twice as expensive as Facebook (NASDAQ:FB) and almost six times as expensive as Amazon (NASDAQ:AMZN). Though they aren’t direct competitors, all three are growth stocks, so they compare well.
This alone isn’t a reason to short TWLO, but it is reason to consider sniping entries on the chart that make sense. There is support at $178 per share from the price action in May. But even if it fails there is another band of support above $160.
This is important because if Twilio falls below $153 for whatever reason, it could fill the earnings gap near $130 per share. While this is not my forecast, it is a possible scenario.
Management just reported earnings to rave reviews on Wall Street, as the stock rallied 70% on the headline. The company delivered on promises and earned the benefit of the doubt.
Often enough, rallies like to revisit the breakout necklines from which they sprang. In this case, TWLO can fall to $150 and it would not change the overall direction. The bulls would remain in charge and it would make for a much better entry point.
The Bottom Line on TWLO Stock
I promise you that I am no Twilio hater. In fact, I bought the dip when it fell to $25 a share years ago. I took heat on that trade because of some headlines in 2017. Back then, I defended my position and profited from it.
My worry now is that the macroeconomic conditions are horrendous yet Wall Street is paying no attention to them. Just because the Fed is pumping the stock market full of morphine doesn’t mean that the economy isn’t sick.
We went from maximum employment to maximum unemployment, so there are concrete reasons to worry. I see no reason to chase all-time highs in the NASDAQ right now, so my sentiment has to extend to TWLO stock too.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.