Though Twilio Inc (NYSE: TWLO ) clearly is not without its problems (like a distinct and significant lack of profits in the foreseeable future), growth has yet to be a problem for Twilio stock. The top line is projected to advance 35% this year, and grow another 25% next year as the power of its cloud-based, self-service telecommunications platform is increasingly embraced.
Still, with a price/sales ratio of 8.5, the likelihood of very thin margins once it finally does manage to turn a profit at least a couple of years from now in addition to the number of bigger and better-funded rivals getting into the business, Twilio stock is anything but a great investment.
Of course, it's only a good trade if and when a catalytic ceiling is crossed.
A Lackluster Outlook
On the off chance anyone reading this isn't fully aware, Twilio provides cloud-based communication services to small as well as large enterprises. If you've ever gotten a message that your Uber driver is nearing your location , it most likely came from Twilio's SMS architecture. Twilio also manages the two-factor login process for software giant Intuit Inc. (NASDAQ: INTU ), and The Coca-Cola Co (NYSE: KO ) relies on Twilio's technology to best manage its repair technicians' schedules using nothing but text messages.
It's the shape of things to come for an increasingly automated world. Problem is, with no real barriers to entry, anyone can effectively get into the business.
And they are. As yours truly noted just a few months ago, Amazon.com, Inc. (NASDAQ: AMZN ) is developing a platform that looks an awful lot like Twilio's, as are Zendesk Inc (NYSE: ZEN ) and RingCentral Inc (NYSE: RNG ). The irony? The more Twilio validates the technology, the more competition it will draw out.
These challenges and the related headwinds ultimately working against TWLO shares are discussed in greater detail by Chris Fraley here , by Chris Tyler here and by several other analysts elsewhere, all coming to the same basic conclusion… Twilio stock just doesn't have much in the way of long-term upside.
The short-term potential, however, is a different story.
Line in the Sand for TWLO
Don't confuse the message you're about to read as a suggestion Twilio just needs more time before it can blossom into a category leader. In fact, don't even confuse the message you're about to read as a suggestion that Twilio stock is a short-term buy. The only thing you can reasonably note from this look at TWLO is that there's a clear line in the sand around $34.80.
The chart of Twilio stock below speaks for itself. Although it tried several times to rally after tanking last October, it could never get over the hump around (though not exactly at) $34.80. What's so interesting is that the stock has continued to try to do so despite a string of failures. Though it's yet to happen, when and if Twilio stock does clear that hurdle, several months worth of pent-up buying could be unleashed in a hurry.
Click to Enlarge
Again, it can't be explained enough that any breakout rally has nothing to do with Twilio's fundamentals, and everything to do with the fact that there's a small subset of traders that want to see TWLO rocket higher at least one more time… so much so they're capable of creating the very outcome they seek. Such a move could very likely be the last hurrah for Twilio stock, but what a trade-worthy hurrah it would be.
Bottom Line for Twilio Stock
Normally the distinguishing line between trading and investing is blurred and obscured. This is not one of those times. Twilio isn't a healthy long-term investment you can feel good about buying and holding. It's not even a great short-term trade yet. The potential breakout move is a great technical trading setup though, and one well worth keeping on your radar as a speculative possibility.
Just don't forget you're renting it, and not buying it to keep… something that's easy to forget once it starts to rack up gains.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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