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Twilio Stock Has Become More Pie in the Sky Than Cloud

Will Healy

Twilio (NASDAQ:TWLO) over-delivered on revenue, and earnings met estimates. Yet, the platform-as-a-service (PaaS) company fell in morning trading as Twilio contends with an elevated multiple and the expectations that go with it. The good news might bode poorly for Twilio stock as the company, priced for perfection, falls short of lofty expectations in the future.

Twilio Stock Met on Earnings, Outperformed on Revenue

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Source: Web Summit Via Flickr For the fourth quarter, Twilio non-GAAP earnings came in at four cents per share, meeting consensus estimates. This still showed improvement, as TWLO lost three cents per share in the same quarter last year. Revenues beat analyst estimates, coming in at $204.3 million — $19.83 million ahead of estimates. This also improved by 77.3% over year-ago levels.

Twilio Stock Has Become More Pie in the Sky Than Cloud

For fiscal 2018, the company earned revenues of almost $650.07 million, $19.86 million ahead of estimates. This also showed substantial year-over-year growth, as TWLO brought in $399.02 million in 2017. The company also met estimates with non-GAAP yearly earnings. The company made 11 cents per share in 2018.

Both Q1 and fiscal 2019 guidance include the cost of the SendGrid acquisition. Since estimates do not include this, it was not clear whether the company guided higher or lower.

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The stock fell by almost 5% in morning trading following the report.

I will admit that, at first, I underestimated Twilio stock. Granted, I think few would have predicted the meteoric rise in 2018 — a 270% increase.  Nor could they have foreseen the growth of over 30% TWLO has seen this year.

Beware of Valuation

However, the stock trades at a forward price-to-earnings (PE) ratio of 710! Granted, triple-digit PE ratios commonly occur in hotter stocks. Companies such as Twilio deliver the future. For this, investors will pay what I call a “vision premium,” an elevated multiple pertaining to companies that bring their compelling vision to the marketplace.

However, even considering this vision, one has to question whether TWLO can justify over 700 times earnings. Some use a discounted cash flow model to justify such a premium. For fiscal 2019, analysts project 16 cents per share in earnings coupled with the forecasted 45.5% growth rate. With the anticipated 8% average growth rate over the next five years, that takes the price to $7.73, barely one-fourteenth of the current stock price.

I expect this stock to trade at a triple-digit multiple for some time to come. I also expect growth to remain robust for the foreseeable future. Despite my bearishness on Twilio stock, PaaS has a bright future. Moreover, in the area of PaaS for cloud-based APIs, Twilio faces only smaller competitors for now.

However, at a $13 billion market cap, concerns remain. The stock fell a few months ago as Uber worked to reduce its dependence on Twilio. One has to wonder if other large cloud players such as Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) or Salesforce (NYSE:CRM) might take an interest in this market. Amazon (NASDAQ:AMZN), which currently provides hosting to Twilio, could also enter this market and push it aside. Either way, this points to a weak moat that could make the cloud-like valuation hard to justify.

Bottom Line on Twilio Stock

Twilio stock fell in morning trading as the mixed numbers disappointed investors. TWLO met earnings estimates and exceeded Wall Street expectations on revenue. However, this did not satisfy investors, and TWLO stock sold off.

Without question, as the first mover in cloud-based API for communications, Twilio had become the go-to in this area. However, smaller competitors have emerged and its small size compared to other cloud players remains a concern.

For now, I see Twilio continuing its rapid growth. However, this valuation is simply dangerous. With Twilio stock, we have no way to tell whether the post-earnings drop is a temporary setback or the beginning of a more permanent decline. I do not recommend sticking around to find out.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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