Don’t Let Twilio Inc (TWLO) Stock Fool You!
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If you thought things could only get better from here for Twilio Inc (NYSE:TWLO); think again. Exactly one year after going public as one of 2016’s most anticipated initial public offerings, Twilio still has a lot going for it … if you’re bearish. But is TWLO stock a short? Let me explain.
As discussed at the end of May, Twilio, a cloud communications play, is not a vehicle of choice for either value or bullish momentum investors. Bottom- and even top-line, the company is far from being profitable, has cash flow issues, an overly optimistic price-to-sales multiple and even warned with below-views guidance in early May.
I’m sure to receive a lot of hate mail for stating the obvious, as well as how TWLO’s technology differentiates it from others in the space. Some will say I just don’t get it. And to a certain extent, they’d be right — I don’t.
Admittedly, I’m more Luddite than technologist. But for those pointing to a Netflix, Inc. (NASDAQ:NFLX) or an Amazon.com, Inc. (NASDAQ:AMZN) as examples that massive losses didn’t stand in the way of those companies; look again at what TWLO does. Oh that’s right, you can’t see what Twilio does. And therein lies a big difference in our view.
Don’t get me wrong, it’s my understanding Twilio does important stuff for obviously some important companies. But if you’re behind the scenes and can’t make money with a technology advantage today, what’s going to happen when the space grows increasingly competitive and commoditized? It’s unlikely anything good will come of that for TWLO stock investors.
Shares of Twilio have rallied in recent days. I’m guessing it’s on investor hope that Amazon’s proposed merger with Whole Foods Market, Inc. (NASDAQ:WFM) means surely Twilio is due for a bailout too? In fact, TWLO stock is up about 15% and has been hitting its best price levels since its earnings fallout in the last six days. Having said that, I’d still say think again if in fact the rally is resting on that belief.
Whole Foods has something of tangible value which Amazon can’t easily replicate or build by themselves — namely, over 400 points of distribution across the country to help conquer the grocery space. That’s a far cry from what Twilio has to offer.
It’s our belief a future business decision is more likely to have the tech giant cutting its relationship with Twilio and use less expensive proprietary technology. I’m not alone in thinking this. With other companies like Uber and Airbnb already pulling back their business, there has been speculation of Amazon eventually parting ways; though the bearish chatter has quieted of late.
So, what’s next? Is it time to short TWLO stock? Based on what’s going on off the Twilio price chart the idea does appear to have its share of warnings. Once again, I’m not alone in thinking this. Twilio shows bearish short interest of nearly 32%. That’s a hefty figure, which personally, I’d respect as additional evidence Twilio shares are not worthy of an investment.
TWLO Stock Daily Chart
Since debuting on the secondary market exactly one year ago, it has been a tough go for TWLO stock bulls. In fact, the only buy-and-hold-type investors not underwater are those, for whatever reason, who decided to buy shares at some point in the aftermath of May’s earnings fallout.
Now and since the WFM stock news, as denoted by the oval highlight on Twilio’s daily chart, those investors have actually racked up some nice percentage gains. The price action has even shifted the technical favor of TWLO stock from being overtly bearish.
First, there’s been an unequivocal dismantling of a bearish flag. And subsequently, TWLO stock has proceeded to break resistance and rally above the 50-day simple moving average while establishing its best relative highs since the earnings reaction.
Given the evidence and strictly on a technical basis, there is less support for the bear case currently. And if you believe all gaps are destined to be filled, TWLO has a nice-sized one to potentially confirm that view.
Having said that, if investors take a step back and look at the entire big picture with its overall lower lows and highs and respect TWLO’s “too elevated to dismiss” short interest, coupled with the off-the-chart findings, our conclusion is TWLO stock isn’t likely finished making new all-time lows.
Twilio Stock Long Put Spread Strategy
As our view is that TWLO isn’t done making new lows, but appreciating that a bearish position would be bucking the stock’s current micro bout of bullish enthusiasm, an out-of-the-money vertical put spread is attractive.
Not only does a vertical position reduce risk on a contract basis, but if a bearish trader wishes to hold this type of short stock proxy through the next earnings event in mid-August — one which could act as a strong and favorable catalyst — it makes even greater sense while costing fewer cents.
Reviewing the TWLO stock options board, the Aug $26/$24 put spread is priced for 65 cents with shares at $28.75 for a max payout of $1.35 or 207% if shares drop 16.5% and back towards the lows at expiration.
Bottom-line and for a stock without a positive one of its own, this TWLO stock vertical fits in well with what has been presented, without getting too hopeful in a bearish sort of way — and unlike today’s dream-weaving bulls.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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