At first look, the extraordinary rally in technology-based investments may seem completely unjustified. With millions of Americans facing eviction risk, along with a persistently worrisome novel coronavirus pandemic, names like Twilio (NYSE:TWLO) appear to have run counter to the fundamentals. Nevertheless, if you drill into the specifics of what drives Twilio stock, you may leave with a different impression.
As you may know, Twilio specializes in communication APIs. Utilizing the standard definition, communication APIs are programming interfaces that embed voice calls, SMS messaging, and other communication forms in a software application or product. But to really appreciate this innovation, and by logical deduction, Twilio stock, it’s best to take a retroactive look at communication technology.
In the first generation of communication, we had public switched telephone networks. Essentially, this system only facilitated one line for each person or office. As you can imagine, this setup eventually became inefficient.
Later, private branch exchange became the communication standard. This prevented the need for an organization to have each employee configured with their own phone line. Next came voice-over-internet protocol (VoIP), which revolutionized the telecommunications industry.
Today, Twilio stock is levered to the fourth generation of telecom innovations. With communication APIs, organizations can integrate various communication formats — voice, text, email, video, etc. — under one platform. As you can imagine, consumers/clients don’t have one particular way to communicate in the digital age. And not having a means to adapt to individual consumer needs could be a business killer.
Especially in this crisis, there’s never been a more important time for communication APIs. With people seeking answers, as well as efficient contactless services, companies can’t afford to be stagnant in this arena.
Twilio Stock May Have Hit an Inflection Point
Although the fundamental driver of communication APIs will be critically important in the years ahead, that doesn’t necessarily make Twilio stock a buy, especially at these elevated prices. In recent sessions, TWLO has looked terribly volatile, sending a chill down prospective buyers’ spine.
At time of writing, Twilio stock is barely holding onto its 50-day moving average. Even more disconcerting is that the tech sector suffered a huge correction last week, with the Nasdaq Composite index — mirrored in the Invesco QQQ Trust (NASDAQ:QQQ) — shedding 3.9%, while TWLO shares dropped 13.5%.
To be fair, some analysts have described the red ink as part of a healthy correction. They could be right. After all, many publicly traded companies have gotten ahead of their fundamentals during the new normal. It’s only right that they cool off. However, for some of the most relevant tech names, they should eventually fire back.
Of that, I have zero doubt. But when they will resume their bullishness is the key question.
Prior to this write-up, I was curious whether TWLO stock had entered bubble territory. To get a better understanding, I juxtaposed its year-to-date price action against the build up in the Nasdaq during the 2000s tech bubble. What I discovered was a very strong correlation coefficient of 89.5%.
You can look at the price action of Twilio stock versus the Nasdaq tech bubble to confirm the similarities. Should the correlation continue, you would expect TWLO to eventually collapse like the Nasdaq did.
To clarify, I’m not suggesting doom and gloom for Twilio. History doesn’t always have to repeat. However, I wanted to know if the technical performance of TWLO suggests a directional trajectory. From the strong correlation above, it seems more likely that the communication API firm may face more red ink before moving back into the black.
Cryptocurrencies are not Helping TWLO
While many analysts marveled at the performance of certain stocks during this pandemic, another sector was also moving strongly: cryptocurrencies. Here, Twilio offers a competitive advantage against internet giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
One of the favored security protocols in the crypto space is two-factor authentication or 2FA. For many folks, the gold standard is Google Authenticator. However, Authenticator can be incredibly inconvenient, especially if you want to switch the main device where the 2FA is installed. In this case, users have to sync their accounts over again.
With Twilio’s Authy alternative, it’s a much easier process to switch from device to device, as well as creating backups in case the main device is lost, stolen, or broken. However, with cryptocurrencies tanking sharply along with tech stocks, Twilio may miss out on demand for its services that may have existed if the cryptos were performing robustly.
Therefore, I think the best approach to Twilio stock is to let the volatility provide a discounted opportunity. Outside factors are pressuring the underlying company. In addition, TWLO’s price action suggests that it has hit a temporary peak. Probably, you’ll be much happier waiting than buying shares right now.
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. On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.