Way back in 2017, I wondered if Twilio (NYSE:TWLO) was a $15 or $30 stock. In May 2019, I discussed whether Twilio stock was worth owning at 23 times sales. Now, trading at 26 times sales, I can’t help but wonder if there’s no price investors won’t pay for this momentum growth stock.
As single-stock articles go, I haven’t written about Twilio since February. At the time, I wasn’t the slightest bit concerned about the company’s profitability in 2020, suggesting it was more important for the powers that be to invest in the business, forsaking profits in the near term for greater financial gains down the road.
TWLO stock was trading around $118 at the time.
“I’d bet my last dollar that hedge funds owning Twilio were buyers of its stock in the days following the release of the company’s third-quarter and fourth-quarter results. On the other hand, the weak hands were likely selling,” I wrote Feb. 24.
“The concern about profitability is way overblown, and more importantly, utterly misguided, given the potential market share ahead of it.
“Is $130 as good as it gets? Not by a longshot.”
Now at $269, I can’t help but think this stock has a bit of Tesla (NASDAQ:TSLA) in it. You know, detached from reality.
What’s fair value for Twilio? $300? 400?
The Sky’s the Limit for Twilio Stock
I’m not suggesting that you should go and pay $269 for Twilio. After all, it’s up almost 300% from its March, 52-week low. It’s got to cool off at some point.
Sure it does, suggests InvestorPlace contributor, Matt McCall.
“While TWLO stock offers investors viable upside channels, I’d like to emphasize that this is a buy on the dips opportunity, not a buy right now one. Presently, shares may be stretched. For the month, shares are down more than 5% despite encouraging Q2 results. That signals that Wall Street is looking for more and not getting it,” McCall wrote on Aug. 27.
“With how much TWLO stock has leapt, I wouldn’t be surprised if shares corrected.”
I couldn’t agree more. Do I think it’s going to fall $69 anytime soon to below $200? I do not.
Further, McCall raises an interesting point about cryptocurrencies and two-factor authentication (2FA) that I’ve never considered. As things develop in this area, Twilio could be sitting on an additional, potentially lucrative revenue stream. Multiply that by 26 times sales, and you’ve got your justification for the next leg up to $400 and beyond.
Of course, that’s not happening anytime soon. For this reason, you could see an exhaustion rally that takes TWLO to $300 before coming crashing back to reality.
So, my bet is $300 is the top between now and later in 2020. I would be cautious about buying between $269 and $300. Only someone holding for three to five years should consider such a move.
100% It’s Overvalued
In Mid-August, InvestorPlace’s Nicolas Chahine suggested investors avoid TWLO because it was significantly overpriced. Putting it in easy terms anyone could understand, Chahine said, “it has 30 years’ worth of full year sales built into its stock price today. If trouble comes there is little intrinsic defense against the corrections.”
He believes that investors could get an entry point below $200, perhaps around $180. That’s a 33% correction.
And while that seems far-fetched given the ride it’s on, the reality is that when you least expect it, the smart money skedaddles, leaving the not-so-smart money holding the bag.
From my perspective, despite Twilio delivering strong quarterly earnings in early August, it’s come too far, too fast. As I said earlier, only someone considering a three- to five-year hold should contemplate buying at current prices, and even then, your risk-to-reward proposition is not in your favor.
If you do buy, I’d only purchase a quarter of what you’re looking to spend, and watch it closely for the next few weeks. I’d be shocked if you can’t buy TWLO for less than you paid for the one-quarter position.
Long term, TWLO remains a buy, but not at these prices and market froth. If you already own it, I might take some profits.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
