Should Investors Sell Some Shares of Twilio (TWLO) Stock?


What a stellar year 2019 has been so far for the owners  of Twilio (NYSE:TWLO) stock!  We are increasingly living in an interconnected world in which companies need to digitally communicate with their clients non-stop. A leader in the communication platform-as-a-service (CPaaS) sector, TWLO  has benefited from that trend, enabling  Twilio stock to surge 63% in 2019.

Are Investors Getting Too Bullish on Twilio Stock?

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TWLO is expected to report its Q2 earnings on Aug. 5. Let us now look at what investors can expect in the second half of the year from TWLO stock.

How Does Twilio Make Money?

TWLO’s cloud communications platform helps small, medium  and large enterprises improve their apps and their digital interactions with their customers. Several of its well-known clients include Coca-Cola (NYSE:KO), Lyft (NASDAQ:LYFT), Netflix (NASDAQ:NFLX), Twitter (NYSE:TWTR), and Yelp (NASDAQ:YELP).

As of Mar. 31, the company had 2019154,797 active customer accounts (ACAs), compared to 53,985 a year earlier. In fact, the number of active customers using Twilio’s platform to communicate with their clients has increased four-fold in about four years. As TWLO attracts  more customers to its platform, its recurring software-as-a-service (SaaS) revenue continues to rise.

On Apr. 30, Twilio released its Q1 results. Its revenue increased 81% year-over-year (YoY) in Q1, to $233 million. In Q1, its top line rose 14% versus the fourth quarter of 2018.

Part of the reason for the  company’s Q1 revenue gain was its acquisition of cloud-based email services leader SendGrid, which closed on Feb. 1.

The owners of TWLO  stock were also pleased by the fact that the company raised its full-year guidance in conjunction with its Q1 results. Management now expects its 2019 revenue to be between $1.102 billion and $1.111 billion, up from $1.065 billion to $1.077 billion. Similarly the company is calling for adjusted earnings  per share of 11 cents to 13 cents, up from 8 cents to 11 cents previously.

TWLO ‘s revenue growth should accelerate for the rest of the year. As a result, the leading provider of in-app communication solutions is setting the bar quite high for its next earnings report.

What Could Derail TWLO Stock?

Twilio is regarded as a high-growth company and as a disruptor in its field. And many analysts agree that its best days are possibly ahead. However, Wall Street is also getting concerned about the  rich valuations of Twilio stock.

Different analysts may use different metrics to gauge the relative value of companies in different industries. One metric they use is price-sales (PS) ratio. The PS ratio of TWLO stock is over 19.5.

Analysts prefer a low PS ratio, ideally below one. However, a PS number between one and two is more common. To put the metric into perspective, the S&P 500 index‘s average price-sales ratio is 2.1.

Another way to analyze a stock’s valuation is to compare its valuation to that of other companies in similar industries or segments. In general, SaaS stocks are richly valued. Our readers may be interested to know that the PS ratio for the cloud computing giant Salesforce.com (NYSE:CRM) is 8.8, while Veeva (NASDAQ:VEEV) and Workday (NASDAQ:WDAY), two other SaaS stocks, have P/S ratios of about 16 and 30, respectively.

Although the PS ratio of TWLO stock is very high, investors should also remember that PS is only one of many valuation metrics. Moreover, the metric does not take into account the profitability or costs of Twilio.

Twilio is also facing increasing competition on multiple fronts from several enterprise software companies, including Salesforce.com and Bandwidth (NASDAQ:BAND).  The digital communications revolution is here to stay, but the space TWLO operates in is fiercely competitive.

The History of TWLO Stock

Twilio went public in June 2016 at an opening price of $23.99. By Sep. 2016, the price of TWLO stock was hovering around $70.

However, on May 8. 2017, Twilio stock reached an all-time low of $22.80. After trading in a narrow range in the next six months, in 2018, Twilio stock began its huge rally.

Then came the market selloff during the last quarter of 2018. The decline, which hit the tech sector especially hard,  was seen as an important signal that investors were no longer willing to be exuberant about expensive technology stocks. On Christmas Eve, TWLO stock reached an intraday low of $73.15

Over the past 12 months, TWLO stock price has surged over 140%. On June 20, it reached an all-time high of $151. In other words, Twilio stock has run up quite far, quite fast. And its current price is about 100% above where it was on Dec. 24, 2018.

Those investors who follow short-term technical charts will be interested to know that TWLO stock has spent a good portion of 2019 in overbought territory. It is possible that some profit-taking may negatively impact Twilio stock in the near future, possibly prior to its Q2 earnings report.

TWLO is a growth stock and a speculative stock. Therefore, in the coming weeks, I expect Twilio to be a battleground between investors and traders. While long-term investors would like to see TWLO stock exceed and stay over the $150 level, traders are likely to keep it between $125 and $145.

As long as Twilio remains in a long-term uptrend, investors may continue to buy TWLO stock on dips. However, if prolonged profit-taking sends Twilio stock below $110, the validity of the long-term uptrend would need to be re-evaluated. And in the wake of such a decline,  it may be some months before TWLO stock price sets fresh records.

The Bottom Line on Twilio Stock

In a few weeks, analysts will likely scrutinize Twilio’s fundamentals to see if the stock offers any further positive catalysts that may help keep TWLO stock price sizzling in the second half of the year. Any sign that TWLO’s growth outlook is not as strong as expected in Q3 or Q4 may be enough to spook Wall Street, sending TWLO stock price lower.

Therefore, investors who do not yet have a position in the stock may want to wait until TWLO’s earnings report in early August before buying TWLO stock. Doing so will give them a better view of the developments affecting the industry in general and  the company in particular.

Those investors who already own Twilio stock may consider taking some money off the table or hedging their positions. Such a hedge would limit their downside risk in the event the market drops or if the bullish thesis on TWLO stock ends up being wrong,.

As for hedging strategies, covered calls or put spreads with Aug. 16 or Oct. 18 expiration dates could be appropriate, as straight purchases of put options are likely to be expensive due to heightened volatility. Investors who choose this route can reevaluate their long positions after TWLO reports its earnings.

Well-performing stocks tend to keep on winning, and the recent strength of Twilio stock might be a good indication that within three or four years, investors who buy TWLO stock on weakness are likely to be rewarded handsomely.

As of this writing, the author holds KO covered calls that expire on July 19.

 

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