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3 Reasons to Stick With Twilio Stock as It Runs Back to Record Highs

Twilio (NASDAQ:TWLO) stock has been one of the market’s best performers in 2020, as the Covid-19 pandemic has actually accelerated demand for the company’s cloud communications tools. Year-to-date, TWLO stock is up 223%.

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

This huge rally in Twilio’s stock is nearing a critical point, wherein the rally will either breakout into another gear, or start to crumble.

That’s because of the emergence of potential technical pattern, which traders like to call a “double top.”

Back in early October 2020, Twilio stock topped out around $340. It has since retreated, and is now rebounding back to $340. If the stock fails to push above $340 this time around, a double top will form, which is a bearish signal that the Twilio stock rally has topped out. But, if the stock breaks above $340 this time around, that’s a bullish signal that the Twilio stock rally is shifting into a higher gear.

For three big reasons, I think the latter is going to happen. Twilio stock is on the cusp of a big breakout.

Here’s why.

TWLO Stock Is a Long-Term Winner

The first big reason I think TWLO is ready to breakout is very simple: This is a long-term winner, with strong enough fundamentals to warrant the stock continuing to push higher for the foreseeable future.

Zooming out, we are are sprinting into the API Economy. A quick refresher: API is short for application programming interfaces, and communication APIs are essentially little blocks of code that enable seamless communication between different software services, so that one computer can “talk” to another computer.

In essence, communications APIs are what allow Uber (NYSE:UBER) to send you texts when your ride is here, or Postmates to send you a ping when your food has arrived, or Zoom (NASDAQ:ZM) to operate on your HP laptop the same way it operates on your iPhone. Communication APIs enable all of that.

Because we are moving into an economy wherein everything is built on software, communication APIs are becoming increasingly mission-critical and ubiquitous, to a point where many technologists say that we have entered the API Economy — or an economy where all communication is powered by these APIs.

Twilio is at the epicenter of the API Economy, having developed a suite of best-in-breed APIs for enabling text-based business-to-consumer (B2C) communications.

Long story short, if I’m a business and I want to leverage SMS texting to communicate with my customers, then I’m going to use Twilio’s APIs to make sure that the message I send out is seamlessly communicated to every one of my customers, regardless of their phones’ software or version.

This sort of text-based B2C communication is the future. Twilio’s APIs enable that future.

To that end, this is a long-term winner with visibility towards reaching B2C communications ubiquity over the next decade. The market cap today is still under $50 billion, meaning there’s ample runway ahead for TWLO.

Robust Momentum

The second big reason I think TWLO stock is ready to breakout to new highs is because the company has robust business momentum today.

Twilio’s third-quarter earnings report confirmed that the company is winning big amid the Covid-19 pandemic, because in the absence of physical events, businesses have been forced to rely more heavily on digital communications to stay in touch with their customers.

Twilio added 8,000 customers in the quarter, growing its customer base by 20% year-over-year. Dollar-based net expansion rate of existing customers clocked in at an impressive 137%. Revenues rose 52% year-over-year. Operating margins expanded 285 basis points. What was an operating loss in the year ago quarter, swung to a profit this quarter — marking the third consecutive quarter of positive operating profits.

Clearly, everything is going right for Twilio today. The customer base is expanding. Those customers are spending more. Revenues are roaring higher. Margins are expanding. Losses are turning into profits.

So long as this robust momentum persists — and it should — then the trend will remain your friend in Twilio.

Favorable 2021 Outlook

The third big reason I think Twilio is ready to make new highs is because the company’s business outlook for 2021 is quite favorable.

In 2021, we will get widespread distribution of multiple Covid-19 vaccines, which will spark consumer behavior normalization and a rebound in general economic activity. Amid this rebound in economic activity, corporate spending will rebound. This rising tide will lift all boats in corporate spending budgets, Twilio included.

At the same time, political noise will drown out in 2021. Rates will remain at zero. The Fed will still have a bunch of stimulus firepower. The entire stock market will power higher as earnings rebound from the 2020 plunge.

The outlook is quite favorable — for the stock market as a whole, for growth stocks who thrive in zero-rate environments, and for Twilio, who is built on the back of corporate spending.

With such a favorable 12-month-forward outlook, it’s unlikely that the rally in TWLO breaks down anytime soon.

Bottom Line on TWLO Stock

Twilio stock is nearing a critical point in its rally — a re-test of all time highs.

If Twilio passes the test, the sky is the limit over the next few months. If TWLO fails the test, the rally will come under pressure.

Fortunately for shareholders, the fundamentals and optics strongly imply that TWLO stock will pass the test with flying colors, and that the huge 2020 rally in Twilio stock will live on.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/hypergrowthinvesting/2020/12/three-reasons-to-stick-with-twlo-stock-record-highs/.

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