Are you looking to make a move in one of today’s hot growth stories? If so, shares of Twilio (NYSE:TWLO) are shaping up in a big way for a purchase. Let’s look at what makes TWLO stock a buy in today’s market, off and on the price chart, as well as a smarter, risk-adjusted way to position.
Investors aren’t alone if they’re concerned right now. I’m talking about the stock market and specifically, momentum in technology stocks. New highs on an almost daily basis for the tech-heavy Nasdaq Composite index and year-to-date gains of more than 30% are increasingly disconnected from the novel coronavirus pandemic still wreaking havoc on American lives and a still shaky U.S. economy.
Amid that backdrop, cloud communications specialist Twilio has rallied alongside the best of them. Shares of TWLO are up 169% in 2020. Twilio stock has also doubled in price from where the shares were trading immediately before Covid-19 sank the broader averages into a vicious and historic bear market.
TWLO Stock is Made for Distanced Life
To be fair, technology amid today’s new socially distanced reality, both at home and work, has been a huge benefit in innumerable and critically important ways. From Zoom Video (NASDAQ:ZM) connecting people, Amazon (NASDAQ:AMZN) keeping supplies at our fingertips, Teladoc (NYSE:TDOC) allowing otherwise impossible doctor visits or Peloton’s (NASDAQ:PTON) biking platform making fitness at home fun and accountable, we owe a lot to these tech businesses.
Similarly, while not as tangible as those technologies, what TWLO makes possible has taken on more and more importance. In a nutshell, Twilio’s software-as-a-service (SaaS) allows people and businesses to connect digitally. Its tools enable customers to offer messaging, voice, and chat services so critical in today’s world, quickly and seamlessly.
From clients like Netflix (NASDAQ:NFLX), Lyft (NASDAQ:LYFT), privately held Airbnb or eBay (NASDAQ:EBAY), Twilio supports a who’s who in our daily lives. And business is growing like gangbusters as last month’s solid earnings beat and above-views sales guidance points at.
Still, when it comes to investing and stocks, there is a thing called “showing too much appreciation.” It manifests itself in price momentum. It’s great while it lasts, but that same aggressive, convinced behavior is a two-way street. And no, this time is not different.
The good news — and behind the scenes where this type action occurs even in the healthiest of investing environments — TWLO has already done the unthinkable.
TWLO Stock Weekly Price Chart
Source: Charts by TradingView
The fact is even the best and most dearly held stocks like Apple (NASDAQ:AAPL) correct in price. No single stock has ever proved immune to bearish cycles. And when that day does arrive for AAPL stock, the price action may wind up looking similar to what’s been constructively playing out in TWLO stock the past handful of weeks since its July earnings release.
In the report’s aftermath, slightly stiffer profit-taking led to a correction of 17% from Twilio’s record highs. Declines of as much as 30% are considered commonplace in healthy markets for momentum-driven growth stocks of TWLO’s caliber. As much and by itself, the price action could be viewed favorably. But there’s more too.
The decline in Twilio has developed into a smaller weekly chart second-stage base following May’s massive breakout from a yearlong bear market. It’s promising as a platform for the stock to eventually break out and rally to new all-time-highs.
As the weekly chart also shows, shares of TWLO confirmed a pivot candlestick low within the second stage base last week. Today’s price action has the stock following through marginally into the right side of the base. It’s bullish. And with stochastics on the cusp of a bullish oversold crossover, there’s decent technical support for buying shares inside the base closer to the low, rather than waiting for a breakout entry.
Consider an October Collar Strategy
What I’d warn with this type of entry is if the current base begins to fail. Remember, last week’s 17% correction is still well-removed from larger, but normal declines of 30% and even larger price drops found routinely in less friendly market cycles. One idea for using Twilio’s options for hedging this obvious stock risk is the collar strategy.
Compared to buying shares the at recent $269.25, for about $271 or a premium of 0.65%, investors can purchase a limited, reduced risk and very adaptable TWLO stock collar using the Oct $230 put / Oct $330 call combination.
Used dynamically, the strategy allows for risk-adjusted profits to grow as Twilio shares trend higher. But in the event the second-stage base falters, investors are in a much stronger financial and mental position to adjust the collar and possibly to a sizable advantage as others are panicking.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Investment accounts under his management do not currently own any securities mentioned in this article. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.