Twilio (NYSE:TWLO) stock rallied over 320% from the March bottom. Clearly it belongs to the lucky Covid-19 stock bunch that benefit greatly from the new normal. The risk is that investors could be overestimating how much change will linger going forward for Twilio stock to sustain this.
There is still a lot of fear from the virus, but this will change when we get a vaccine (or vaccines) in the next few months. Most of us don’t want to wear masks if we don’t need to.
Medical experts are also perfecting therapeutics to handle the complications from Covid-19. All this is to say that the advantage that TWLO stock and its cohort of cloud companies may be tapering.
I made similar cautionary trading comments in early June about this stock but it beat the odds then and made new highs. Today I reiterate the message and for similar reasons. But I also add the point that from a trading perspective, traders could chase the breakout form $277 and more from $289 per share. Meaning I would be cautious but only until the bulls prove that they have more upside in them.
Otherwise, investors should have patience to wait for better entry points to invest in it. Trading and investing have different strategies and this stock has opportunities for both.
Know Where to Chase Twilio Stock from Here
I’m not a fan of chasing runaway stocks, especially late in the cycle. Although they do not ring bells at the tops, Twilio stock’s price action could be showing signs of exhaustion. Even though it still sits close to its all-time high, unless it breaks through them soon it could be starting its descent to build a better base.
Stocks don’t rally forever — in fact they need corrections to extend their rallies. The longer they go without one, the more vulnerable they are to crashes. Add to it that the current stock market in general is over-extended in a similar rising wedge pattern, and it makes for precarious position for these winning stocks.
Valuation matters, and Twilio is expensive. Since it’s a growth stock, I don’t need it to be cheap, but it has a lot of hope built into the stock price. Currently it has 30 years worth of sales baked into its per-share price today. There is no denying that it has growth opportunities in this digital revolution, but investors may be putting too much faith into it too quickly.
The charts suggest that the bulls are definitely in charge for now, but if they need to hold $260 and $240 per share, or else they trigger bearish patterns.
There Is Plenty of Support for the Bulls
There is no reason to panic yet because there are several levels of support below current price and about $20 apart. This is good because TWLO might need it. The politicians are unpredictable going into the elections, and they could cause a correction in the markets. Stocks that have rallied as much as this one are vulnerable to pullbacks. That alone is not a reason to short it but it’s definitely cause to exercise some patience and caution.
Investors who buy into it now should leave room to add to their positions. Going all in at once near all-time highs is reckless, especially when we are still faced with the worst economic conditions in recent memory. Last week, 15,000,000 U.S. citizens claimed unemployment and the U.S. printed a native GDP. These are sub-optimal conditions in which to expect overexuberance to continue without any corrections.
The options markets offer an alternative to buying shares outright. For example, an investor can sell the Oct $210 put and collect $3 for this. Getting long this way means that TWLO stock could fall another 23% and the investor would still not lose money. Furthermore even if the rally stalls, they would still retain maximum gains and create profit out of thin air.
Using options has the mystique of risk, but in reality for situations like these, options offer a great alternative to chasing a stock and leave room for error.