Twilio (NYSE:TWLO) stock lost more than 60% of its market capitalization since February 2021. In the past few months, ascending inflation expectations and rising bond yields drained investments in growth stocks. Investors are actively shifting toward safe havens and the move is unlikely to stop, with U.S. yields stretching to fresh highs. Despite an exciting equity story, TWLO stock is not an opportunity at this stage.
Tight monetary conditions are a bad omen for growth stocks. Profitless stocks, such as Twilio, are poised for further losses. This is because future earnings will be impacted by rising interest rates, weighing on the company’s profitability profile. U.S. 10 year yields hit a three-year high of 2.76% today, indicating that investors anticipate a faster U.S. Federal Reserve tightening pace to fight against rising inflation. As interest rates rise, so do discount rates used in valuation models like the Capital Asset Pricing Model (CAPM) and Discounted Cash Flow (DCF). This implies lower valuations for growth stocks. The annual inflation rate in the U.S. is expected to rise by 8.4%, making it the hastiest advance of the past ten years. Policymakers have no choice but to turn aggressive policy tightening on, which will bring additional headwinds to Twilio.
Despite leading the rapidly growing communication platform-as-a-service (CPaaS) industry, TWLO stock is still struggling to deliver a profit. Revenues should expand on average by 30% over the next three years to $6.51 billion in 2024. The CPaaS specialist had a comfortable cash position of $4.34 billion at the end of 2021, enough to pursue its operations for the next four years. Twilio’s bottom line is expected to erode in 2022, posting a net loss of $1.13 billion compared to a deficit of $950 million last year.
In addition, TWLO’s valuation metrics are overvalued despite the 60% consolidation seen since its latest high. With a forward EV/EBITDA 100x and a 2022e EV/Revenue of 6.04%, there is still room for downside on TWLO stock. Rising interest rates and inflation prints do not bode well for TWLO stock in the near-term. Bearishness is likely to endure on the shares of this CPaaS specialist. Until Twilio improves its profitability, investors should not try to catch this falling knife.
On the date of publication, Cristian Docan did not have (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.