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The Market’s Giving Twilio Stock a Chance to Catch Up With Cloud Peers

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Years from now, when we look back at the 2019 performance of Twilio (NYSE:TWLO), we’ll regard it as a reasonable success. At time of writing, Twilio stock is up a little over 15%, which isn’t too shabby. But compared to prior performances, and to names in the cloud sector, it’s more than disappointing.

The Market's Giving Twilio Stock a Chance to Catch Up With Cloud Peers
The Market's Giving Twilio Stock a Chance to Catch Up With Cloud Peers

Source: rafapress / Shutterstock.com

Further, TWLO stock suffered a split personality this year. In the first half, shares skyrocketed 56%. However, the second half saw up to this point a 29% decline in market value. The performance of Twilio’s cloud peers is best seen in the Global X Cloud Computing ETF (NASDAQ:CLOU), which is off less than 2% since June 30. The exchange-traded fund makes TWLO the 11th-largest holding among its 37-stock portfolio.

Thus, we come across the inevitable question: Is TWLO merely consolidating for the next leg up or is the recent volatility a harbinger?

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All the Signs are There

Frankly, we have many signs that suggest the latter. For starters, the communications specialist does not seem to have a realistic pathway to profitability anytime soon. Net income losses continue to widen in both quarterly and annual comparisons. Of course, that’s not the biggest concern for small, fast-rising tech investments like Twilio stock. But because it doesn’t pay dividends, shareholders would like to see fundamental progress.

And while Twilio still maintains impressive revenue growth on a percentage basis, you’d actually like to see more sales expansion. With the cloud communications provider making key but pricey acquisitions, the company must justify the market premium for TWLO stock.

Finally, Twilio’s balance sheet has become much more uncomfortable than it was in prior years. In my last write-up for Twilio stock, I mentioned the massive jump in goodwill. In a bull market, this is fine, so long as the acquisition that spiked goodwill starts paying its dues, if you will.

However, with the pressured situation in the books, a high level of goodwill can become problematic. So, how should investors approach TWLO stock in 2020?

Untapped Opportunities for Twilio Stock

If you can’t stomach the idea that your equity play could lose huge chunks of value, I’d be very cautious on TWLO stock. Although the underlying business is relevant and compelling, management has taken huge risks with its acquisitions. If those risks don’t pan out, look out below!

Moreover, the goodwill that I mentioned above could also become painfully problematic in a recession or bear market. Although we currently have a limited trade deal on hand, you must remember what the current administration represents. Stability and consistency it does not.

However, if management can regain control of the narrative over the next few months, Twilio stock has a legitimate shot at surprising (positively, this time) in 2020. I say this because the tech firm is leaving many dollars on the table. If they can better market their services to capture unaddressed needs, TWLO can truly fly.

Not surprisingly, Twilio’s corporate clients are mostly physically located in California. According to HG Insights, over 1,000 companies in the Golden State do business with Twilio. That dwarfs any other state by a country mile.

Also not surprising is that the tech and business services industries make up the majority of Twilio’s client demographics. It really starts falling off a cliff from there.

In the company’s earlier stages , the lack of diversity in industry and location wasn’t terribly important. But as the company grows via acquisitions, it needs to expand its scope. That’s the challenge … and potentially a lid on TWLO stock momentum.

However, it’s also an opportunity. If Twilio can convince clients in finance, education, healthcare, retail and hospitality to take the plunge, the case for Twilio stock becomes much more palatable.

Wall Street’s Giving TWLO Stock a Chance

Of course, knowing what to do and actually doing it are two different things. Presently, the financials don’t look very promising for Twilio stock.

But as we all know, the markets represent speculation on future value, not past performance. Here, Wall Street appears to be giving TWLO an opportunity to make its case for 2020.

Despite concerns and disappointing news, the volatility in TWLO stock appears to have stabilized. Since Nov. 1, shares are up nearly 3%. Although I wouldn’t consider this the most convincing bullish signal, at least the bleeding has stopped. That tells me that the Street will give the company a fair shake.

It’s now up to management to make good on this opportunity. If they can tap into the unaddressed market and make conversions, we’ll see Twilio stock fly. If not, you might want to look for another investment.

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

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