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Twilio Stock Is More Compelling After the Year It Has Had

The stock market’s price action has confused most investors. I interact with thousands of them on a weekly basis and too many keep asking if a “Santa Claus rally” is going to come. This rings strange because the S&P 500 just broke new records. The narrative and expectations are lofty. This makes finding bargain stocks at current levels tricky. Today, though, we will determine if Twilio (NYSE:TWLO) and TWLO stock present an investable opportunity.

The Twilio (TWLO) logo is displayed over a white background on a smartphone screen.
Source: rafapress / Shutterstock.com

Before we get into it, however, it’s important I address the perception happening right now. These conversations I noted earlier concern both sides of the argument; they’re bearish because they show investor expectations are incorrect, but also bullish because they suggest investors are still looking for entry points. Meanwhile, reality lies somewhere in the middle. By in large, corporations are extremely profitable in spite of headline concerns.

So, with all that said, here’s what to know about TWLO stock moving forward.

TWLO Stock: Inflation Is Not Necessarily Bad

Right now, there is an ocean of cash, hence the inflation problem. This was by design from the government and they cannot repeat it. Therefore, it’s important for the Federal Reserve to not go overboard with their reaction to inflation. Remember what happened in 2018 when they started a tightening cycle? They capitulated quickly and had to reverse the process just a few months later. This time they did not leave much in reserve to restart a quantitative easing (QE) program.

Nevertheless, until a change in these parameters happens, I would buy the dip in quality TWLO stock. But investors should know that this stock runs extremely fast in both directions. As such, it often traps folks on the wrong foot. That makes it especially important to choose your entries carefully.

In this case, TWLO stock has lost a considerable amount of its value this year. But the exciting part is it’s falling into a prior pivot zone from September of 2020. More often than not, buyers step up to the plate to catch the falling knife. However, if the markets in general continue to be uneasy, they will bring volatility to this thesis.

Wade Back Into Twilio Stock

Twilio (TWLO) Stock Chart Showing Potential Base
Source: Charts by TradingView

Cautious investors would be smart to take partial entries as to leave room for error. Technically, even though there is support below, losing $235 per share could bring about a new wave of sellers. A secondary entry point would not present itself until below $200 per share. While that is not my forecast, I have to acknowledge that this potential scenario exists.

One way around this possible conundrum is to use options, however. For example, I can sell a Twilio put option for February and collect almost $5 for it. This trade requires no out of pocket expense. In fact, I can collect credits for it to be long Twilio stock. Moreover, I would have a buffer zone between current and my potential base price. This would be a healthy cushion in case the bearish scenario unfolds.

They don’t ring bells at bottoms, therefore investors are usually making judgment calls. Using strategies like the one I just outlined makes that process much easier. Suddenly, investors no longer need to be surgical with their entries into volatile TWLO stock. Plus, there are other options strategies to overlay on top of selling puts to simulate stock ownership immediately.

Trust the Business Model

When markets are nervous about the short-term environment, investors need to be creative to reduce their out-of-pocket exposure. We have gone so long without a real crash that it makes the next one potentially scary. Of course, I’m not calling for one. But I wouldn’t be surprised to see one, either. For that to happen, there would need to be a Black Swan event — nothing about the current macroeconomic conditions necessarily demands a crash otherwise.

There is still too much money. What’s more, consumer spending is still at record levels. Inflation doesn’t really become a problem until it crimps spending — and that’s not the present case. Twilio is in the right business at the right time. The company provides services to the hottest investment themes for the next decade. Evidence of its success can be found in the financials. Total revenues are now almost 10 times bigger than just five years ago. Although Twilio still loses money, that’s what growth companies do.

Right now, TWLO stock has a trailing price-sales (P/S) ratio of 17.3, according to Seeking  Alpha. This is in line with other growth stocks, so there are no bloat concerns. Sure, it’s not dirt cheap, but you get what you pay for. Still, investing in growth stocks is not for everybody. Just ask those who fought Amazon (NASDAQ:AMZN) and Salesforce.com (NYSE:CRM) for a decade.

On the date of publication, Nicolas Chahine did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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