- Twilio Inc is due to report its second set of results since going public in June, 2016.
- Twilio stock dropped over 50% in October, and could very well go back to $40 post earnings.
- But, should you buy TWLO stock now?
San Francisco, California-based cloud communications company Twilio (NYSE:TWLO) is scheduled to report its Q3 2016 earnings on 3rd November, after markets close. Twilio had a terrible run in October, after its spectacular IPO in June,2016. Twilio shares plunged 14.1% on Oct 10, after the company announced its secondary stock offering worth $400 million on Oct 7, eventually moving over 50% lower for the month. Q3 earnings could very well drive the stock back to $40 a share, but should you buy now?
Analysts expect Twilio Inc to report an EPS of $-0.08 on revenue of $66.77 million. These numbers are significantly better in terms of revenue over the same quarter last year, in which revenue came in at $44.3 million. Twilio's first earnings release as a publicly listed company was an impressive one. The company delivered an EPS of -$.08 on a revenue of $64.5M against consensus estimates of an EPS of -$0.14 on revenue of $58.22M. Analysts see a plateau in Twilio’s share price after having climbed for the several months. Most analysts believe that the company still has good fundamentals, and is likely to beat third-quarter earnings expectations. However, the stock may not head too much higher, until it grows into its valuation.
Has Twilio Stock Lost Steam?
Twilio became the first "Tech Unicorn" to conduct an IPO in 2016, at an IPO price of $15 a share. The company managed a very successful listing, with the stock price going up by 92% on listing day. The stock rose to as high as $70 within 4 months of its IPO, a 400% increase over its IPO price, but things have not been great for Twilio in October, losing over 50% of its market cap since the beginning of October. Twilio made a secondary offering of 7 million shares recently, which is likely to have been the culprit. In its SEC filing, Twilio stated that majority of the shares in the proposed offering were expected to be sold by existing stockholders and Twilio would not receive any proceeds from the sale of shares by the selling stockholders. There are reports that Twilio's executive officers and directors sold shares of Class A common stock in large numbers.
The company intended to sell shares worth $50 million initially. Another $350 million worth of stocks were to be sold by other exiting stockholders, totaling $400 million worth of common stocks. Twilio’s offering was initially priced at $47.64, but on October 20, it set the official price of its offering at $40/share. This concession suggests that demand was weak for the shares. There are reports that the CEO and CFO sold a major chunk of Twilio shares at an average price of $38.6, much lower than it’s all time high of $70, as well as the official price of $40/share. When senior executives try to take cash home after huge IPO gains, it sends the wrong signal to investors.
Bessemer which still holds 17.5 million shares was willing to dump shares at 40$ and it could possibly do so in future, given that it sold 3 million shares in this secondary offering. It's worth noting that these selling shareholders didn't exit during the IPO, and chose to do so after the massive post IPO rally instead. The only thing that's changed significantly since then is the stock price. Did these investors (and top execs) think TWLO stock had run up way more than it deserved to? Some would even interpret this as a lack of confidence in the company's future. This is probably a big red flag, and investors would do well to wait and watch before buying into the stock.
Analyzing Preliminary Q3 Results
Twilio stock price didn’t move much when the company announced its preliminary third quarter 2016 financial results, closing at $52.44 on October 11. According to its revised guidance, Twilio’s revenues are expected to be in the range of $70.25-$71.25 million, up from its previous projection of $63 - $65 million. This compares to revenue of $44.3 million in the year-ago period. This indicates a revenue growth of almost 60%, even at the lower end of the guidance. The cloud communications company expects to post an adjusted loss of 4 to 5 cents per share, versus a loss of 7-cents a year ago, which is also a decent improvement from a year ago. Now we need to wait for Q3 earnings to see how good the numbers actually are.
Twilio has a lot to prove in this quarter and in the coming quarters. They have had a very strong start. But can they continue growing fast and be profitable very quickly? Valuations are very high, Twilio is not yet profitable and most investment houses don’t see it to be profitable till 2018. The company is trading at a PS ratio of 13.71, which is nowhere near cheap by industry standards, hence the margin for error is very little. Twilio also expects to report more than 34,000 active customer accounts as of September 30, up from 23,822 a year ago. The company has several big players like Facebook, Uber, Amazon as its customers and is continuing to add more. Twilio has a strong product lineup, and is now entering the IOT enabled communications space. So, it has a presence in all the right places, and is well positioned for the future. As an investor, one needs to be watchful before jumping into the stock, but Twilio does offer great potential. Then again, it all depends on Twilio’s execution, rather than just promise. For now, you might want to sit out and watch the company closely.
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