There are few greater opportunities in the markets than when a company is doing well but the share price is down. Cloud-based communications platform provider (NYSE:TWLO) provides a perfect example of this. Traders recently sold off Twilio stock even though the company is thriving.
Twilio demonstrated significant second-quarter momentum, yet somehow the trading community wasn’t impressed. I’ve seen this happen with other companies and it’s usually a temporary sell-off. In most instances, the mispricing in the stock is eventually corrected back to the upside.
Perhaps the market’s expectations were unreasonably high for Twilio’s second quarter. That should be perfectly fine with prospective investors. Irrational markets create terrific buying opportunities, and that’s what’s happened with Twilio stock.
A Closer Look at Twilio Stock
Whereas the Twilio stock price had been rising in early 2020, the onset of the novel coronavirus put a stop to that. The price crash began in mid-February at around $128 and lasted until Twilio shares bottomed out in March at $68.06.
After that, Twilio stock began to climb its way back up. The pace picked up in May, and in early August, Twilio shares were trading at their 52-week high price of $288.81.
This was followed by a price dip that commenced on Aug. 4, the day of Twilio’s second-quarter earnings data release. Was the market wrong to send the Twilio share price lower?
It’s been said that the market is never wrong, but in this instance it’s possible that traders punished Twilio without justification.
No Disappointments Here
Taking an objective look at Twilio’s second-quarter financial data, it’s difficult to imagine why anyone would choose to sell his or her shares now.
Here is a sampling of the highlights from that quarter:
- Earnings per share of nine cents. This beat the Wall Street consensus estimate of a nine-cent loss and represented a 200% year-over-year improvement.
- $400,849,000 in quarterly revenues. That figure exceeded the consensus projection of $368,230,000 and signified an increase of 45.74% compared to the same quarter of the previous year.
- The number of active customer accounts increased by 24% and reached the 200,000 milestone.
- Ambitious third-quarter guidance of $401 million to $406 million in revenues.
Even if traders didn’t like the quarterly results, the experts on Wall Street seemed to remain bullish on Twilio stock.
Among the prominent analysts who recently lifted their price targets are Bank of America Securities analyst Nikolay Beliov, Needham analyst, Richard Valera, Piper Sandler analyst, Brent Bracelin and Rosenblatt Securities analyst, Ryan Koontz.
Head in the Clouds
There’s no single established reason why the market collectively decided to give Twilio stock a post-earnings beatdown. One theory is that cloud-based platforms have been all the rage during the coronavirus pandemic. As a result, some traders’ expectations have been sky-high for Twilio.
So, I suppose you could say that unrealistic market participants had their heads in the clouds. Perhaps they didn’t fully appreciate the fact that a quarter is only three months and Twilio’s growth story is a multi-year phenomenon.
It’s also possible that investors didn’t like Twilio’s recent stock offering, which enabled the company to raise $1.25 billion. The concern here would be stock share dilution.
But with the company presenting such a strong fiscal profile, it’s unreasonable to dump one’s Twilio stock shares just because there are more shares out there. After all, plenty of companies have initiated stock offerings. And when the company is doing well from a financial standpoint, the share price tends to increase over time.
The Bottom Line
When it comes to Twilio stock, it looks like the analysts got it right and traders got it wrong. Evidently, the experts see what the amateurs don’t. And that’s a company is fiscal growth mode and a stock that’s poised for much higher prices.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.