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Twilio Setting Records After Earnings, But Buyer Beware

Nicolas Chahine

Twilio (NYSE:TWLO) stock management reported earnings last night, and the stock has been active since then. Traders initially sold the stock down on the headline in a knee-jerk reaction but then it flipped green. This morning TWLO is holding the rally — it’s up almost 5%. So clearly the news was indeed more good than bad.

TWLO Stock: Twilio Setting Records After Earnings, But Buyer Beware

Source: Web Summit Via Flickr

What makes this pop impressive is that the stock came into the earnings event already up 52% year-to-date. This is double that of the Nasdaq Invesco QQQ Trust (NASDAQ:QQQ). This differential is even more pronounced farther back in time. Twilio is up over 200% in 12 months. Compare this to the QQQ, which is up 18%. Clearly, the buyers are in charge of this stock.

When a stock is at or near all-time highs, the setup for an upside reaction to earnings is difficult. So the greens today, if they hold, are a testament to the respect that Wall Street has for the stock. Now the onus is on management to continue to execute on its plans this well going forward, so that it continues to prove worthy of the trust that investors have in it.

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The report card was strong. They beat expectations and guided stronger forward. Revenues grew 80% to $233 million when investors were only expecting $223 million. This is a proper result for a growth stock as the company continues to grow the top line.

How to Trade TWLO Stock

So is it a buy here? Not exactly. I call stocks like this too high to chase and too hot to short.

This is a case where your next move totally depends on your time frame. If the intent is to own these shares for a long time, then there is no sense trying to snipe the perfect entry point — but up here at all-time highs, it’s not an obvious entry point into Twilio stock.

This is not a negative statement against the company’s prospects, just a caution against the price action from here. Ideally, it would be better to wait for a pull back to $125 per share but the traders may not allow for it for a long while.

Fundamentally, Twilio is not cheap. This is a tech stock that sells at 26 times sales. Compare that with the original cloud company, Salesforce.com (NYSE:CRM), which sells at only 10 times sales. And remember, CRM stock is not cheap either so I am not comparing TWLO to a bargain. Salesforce’s trailing price-to-earnings ratio is 115, which is more than most mega-cap stocks — even Amazon (NASDAQ:AMZN).

In summary, buying TWLO stock at all time highs requires a lot of faith in the future of the markets in general and in this sector. So the safer bet is to wait for a better entry point perhaps near $125 per share. Otherwise, if not already long it, it’s okay to admit that the trader missed this trade.

Most analysts who cover the stock rate TWLO as a buy as it trades towards the upper end of their price target ranges, so they will need to reset their targets higher or downgrade it soon enough. And that, too, could be a price driver.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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