Twilio Is a Sell as its Growth Story Has Failed to Bring Any Profits Yet
Twilio (NYSE:TWLO), a cloud communications platform that enables developers to build, scale, and operate customer engagement within software applications in the United States and internationally is a company that has disappointed its shareholders in 2022.
The stock is down 65% year-to-date and it trades very close to its 52-week low of $87.67. Is TWLO stock a screaming buy now? I mentioned the word screaming to emphasize the idea to buy shares of Twilio now. I consider it to be a very bad idea overall, and I have a bearish opinion.
The main arguments that build a clear bearish view on shares of Twilio start with its history of profitability.
Things Look Bad When No Profits Are Made
Twilio was incorporated in 2008, and after 14 years of business operations has yet to deliver to its shareholders one of the most important catalysts that drive a stock price both in the short-term and in the long-term, profits.
Its stock price in 2022 is like a quiz for novice investors that check technical analysis to enter new trades. What is the dominant trend? It is a clear downtrend. In early January 2022, the TWLO stock was trading at $262. Imagine waking up after six months and opening your brokerage account to see the stock has now been trading at approximately $90. It is not good news at all.
This has happened as there is one main cause, the company is unprofitable. It is losing money for the past five consecutive years, from 2017 to 2021, and during all the five past consecutive quarters. In a year that growth and overvalued stocks are out of favor, Twilio has rewarded its shareholders with steep losses. Is it a surprise? No. I will elaborate more on the valuation part below.
The sales growth in Q1 2022 was 3.87% when in the past three consecutive quarters it was a double-digit figure. Take a slowing sales growth and combine it with a series of net losses and what sign is flashing for investors is the one that points to exit. Investors have lost their patience with Twilio.
Q1 2022 Results Did Not Make Any Meaningful Rebound
Twilio in its Q1 2022 financial results reported a beat on revenue and on EPS. This should have been enough to have a short-term rally. I believe this rally did not materialize despite good news of a year-over-year increase of 48% for revenue and a first-quarter revenue dollar-based net expansion rate of 127% for two reasons. First, the company delivered a wider year-over-year net loss of $221.62 million, versus a net loss of $206.54 million in Q1 2021.
Second, the guidance for revenue for the second-quarter ending June 30, 2022, of $912 million- $922 million showed a clear slowdown in growth. The expected quarter-over-quarter growth is about 5%, again a single-digit number, and half of what it was during 2021. This is not good news at all.
Is TWLO Stock Now Cheap?
I see no evidence that shares of Twilio are cheap. The Price / Book (FWD) ratio is much lower than the Information Technology sector median value, but that is only because the stock has declined severely. The Price / Sales (FWD), EV / EBITDA (FWD) and Price / Cash Flow (FWD) ratios for the stock are higher than the ratios of the sector. For instance, the Price / Cash Flow (FWD) of TWLO stock is 1,915.43% higher than the sector median value.
I do not see TWLO stock bottoming anytime soon if the broader stock market selloff continues. We have two interest rate hikes amid summer, and more to follow until the end of the year, a scenario that is not favorable for growth stocks like Twilio that cannot generate profits.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
