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Sorry, Twilio Inc (TWLO) Stock Is Not a Short!

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Twilio Inc (NYSE: TWLO ) stock isn't cheap, to be sure. Even with TWLO more than 50% off late September highs, the stock still trades at over seven times the midpoint of its 2017 revenue guidance. And that multiple excludes the company's $300 million in cash. Meanwhile, the price-earnings ratio for Twilio stock is infinite because the company is unprofitable, and rather sharply so. 2017 guidance implies an operating loss of $13 million to $17 million on a non-GAAP basis.

TWLO Stock: Avoid Twilio Inc (TWLO) Stock Until $25.70 or Better!

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In other words, for every dollar of revenue Twilio generates this year, it expects to lose at least 4 cents, plus another 3 to 4 cents in stock-based compensation. (That dilution is excluded from Twilio stock's non-GAAP figures.)

So if Amazon.com, Inc. (NASDAQ: AMZN ) is overvalued at 62 times earnings, TWLO stock must be even moreso. And that should make Twilio stock a tempting target for short sellers.

But it's not that simple. TWLO is a growth stock after all, and growth stocks can stay elevated for a long time. Short sellers indeed have targeted TWLO stock, one reason shares have declined so sharply of late. But as those same short sellers say, "Valuation is not a catalyst." And recent history proves them right.

Yes, The Numbers Matter

Value investors, in particular, often criticize stocks like TWLO, with more than a bit of frustration in their voice. "I guess, for growth stocks, the numbers don't even matter." (AMZN shareholders surely are familiar with that sentiment.)

But that's not the case. A company like Twilio isn't supposed to be profitable yet. It's not even a decade old, which isn't a long time in the competitive tech space. It's investing money in attracting new customers to its cloud communications service, which is what it should be doing. There's no need to forego that spend for profits now, when that spend can drive far more profits later.

Purely from a valuation standpoint, it's too simplistic, particularly in the PaaS/SaaS space, to look at profits without context. It's better for Twilio to spend a dollar on sales and marketing now - even if that adds to its net losses - if that dollar is worth $3 in sales later. And the reason cloud stocks have been so hyped - and so highly valued - is that $1 upfront doesn't just lead to $3 later … Rather, it leads to $1, or even $2, for years and years and years.

So there are investors who are taking the long term - and, dare I say, fundamental - approach toward Twilio stock. TWLO's valuation is based not on what it's doing in 2017, but what it can do in 2020, or 2025. That leads to quite a bit of volatility, as seen in TWLO's short time on the public markets. But that volatility doesn't mean TWLO longs aren't paying attention, and it doesn't mean TWLO is failing. Most notably, for short sellers considering TWLO, it doesn't mean Twilio stock will keep going down.

Sentiment Matters

Of course, there are fundamental arguments for TWLO stock to continue to tumble. Unlike more well-known cloud plays, Twilio has relatively low gross margins since it still has to pay network providers who transmit calls and text messages. Revenue growth is guided to slow in 2017, to 33%.

With similar deceleration, sales wouldn't double again until 2020. $700 million-plus in sales at even 15% operating margin still implies barely $100 million in operating profit. That, in turn, probably puts EPS under $1 - and TWLO stock's 2020 P/E multiple above 35.

But investors should look at recent history in the cloud space. Pretty much every high-flying SaaS or PaaS stock has had similar concerns. And pretty much all of them have held up just fine. Workday Inc (NYSE: WDAY ) bottomed in early 2016 near $50; it's since rebounded sharply, and now trades at over 10x revenue. Veeva Systems Inc (NYSE: VEEV ) was a popular short seller target in 2015; it's at all-time highs, with sales multiples similar to that of TWLO. Splunk Inc (NASDAQ: SPLK ) is near a 52-week high - and trades at over 8x revenue on an enterprise basis. A high valuation doesn't mean a bad stock - at least in the short term.

Bottom Line on TWLO Stock

So there are two concerns when shorting a stock like TWLO. The first is that as long as near-term performance is enough to keep bullish investors happy on the long-term prospects, the stock is unlikely to come down. With Twilio coming out of a strong Q4 that beat expectations, that sentiment seems likely to stay positive for at least the next couple of months.

The second is that a short seller on TWLO can be right and still lose badly. "The market can stay irrational longer than you can stay solvent," the old saw goes. But the market also can be rational and just flat-out wrong. A short seller, however, only profits when the market realizes it's wrong. And that can take a long time.

To be sure, short sellers continue to target Twilio stock. But it's a dangerous game. Just ask short sellers of WDAY, VEEV, SPLK or, most notably, AMZN. Timing is key. And right now, the timing does not look right, at all, for a short of Twilio stock.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

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The post Sorry, Twilio Inc (TWLO) Stock Is Not a Short! appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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