A little over a year ago, cloud communications leader Twilio (NASDAQ:TWLO) was still suffering from a major blow after one of its major customers, Uber, began distancing itself from the platform and building out its own communication tools. At that point in time, investors were questioning the company’s long term growth narrative, there were fears that other big tech giants would follow in Uber’s footsteps, and Twilio stock had flat-lined around $25.
Source: Web Summit Via Flickr
What a difference a year makes.
Now, Twilio has completely shook off the Uber hangover, and is firing on all cylinders as the company has become the distinguished leader in the rapid growth Communication Platforms-as-a-Service (CPaaS) market. Investors are salivating over the long term growth narrative, there aren’t any fears that customers are going to leave, and Twilio stock has roared to $125.
That’s a five-fold increase in TWLO in just over a year. To put that in perspective, the S&P 500 is flat during that same stretch. Naturally, one has to ask: how much higher can Twilio go?
In the long run, much higher. This is a secular growth company that checks off every box that a long term winner needs to check off, meaning that Twilio stock has tremendous upside in a multi-year window. But, in the near term, I’d be hesitant to commit new money to the rally right now.
The stock has come very far, very fast, and the valuation seems stretched. As such, I’d wait for a pullback before either buying in or adding more.
Long Term Fundamentals Are Strong
The long term fundamentals underlying TWLO are healthy, and support the stock heading meaningfully higher in a multi-year window.
Twilio has emerged as the leader in the CPaaS market. Broadly speaking, this market comprises companies of all shapes and sizes integrating real-time communication solutions into their suite of offerings. Case in point: when Uber or Lyft sends you a text that your ride is close. The technology underlying that communication is provided by CPaaS companies.
This space has huge growth potential. Consumers are more digitally engaged through mobile phones than ever before. Thus, businesses have to find a way to reach their customers through their phones, and CPaaS solutions give them a method to do that through personalized mobile communication.
As such, demand in this space will grow by leaps and bounds over the next several years, and the big players will turn into big long term winners.
The biggest player in the space is Twilio. Following the Uber fallout, Twilio has launched a suite of new products and solutions while doubling down on marketing to grow into the unchallenged CPaaS leader. So long as Twilio can maintain this leadership position (and all signs point to the thesis that it can), then TWLO stock will head higher as the CPaaS market booms globally.
Long Term Boxes Checked Off
It is important to note that as Twilio has morphed into a CPaaS leader, the company has checked off all the boxes that a big growth company should check off, such as:
- Consistent big revenue growth that isn’t slowing (Twilio’s revenue growth rates are 50%-plus and accelerating higher).
- Robust customer that also isn’t slowing (Twilio’s customer growth rates have been persistently north of 30%).
- Strong customer retention and loyalty (Twilio’s retention rates are north of 95%, and Dollar-Based Net Expansion Rate of current customers is consistently north of 100%).
- Big and stable gross margins (gross margins have been stable around 55% for several quarters).
- Falling opex rates (revenue growth is outpacing expense growth, and opex rates are trending downward).
Overall, it seems like Twilio is positioned as big growth company for a lot longer, implying big upside for Twilio stock in a multi-year window.
TWLO Is Stretched Here
Although Twilio stock has big upside in a long term window, the stock looks unnecessarily overbought here and now.
First, the valuation is extended. At 14x forward sales, Twilio stock is starting to look expensive even for a high-growth cloud software company. Many other stocks in this space trade at high single digit to low double digit forward multiples. But, a low-teens forward sales multiple puts TWLO stock at the expensive end of the group.
Second, the technicals aren’t favorable. Over the past six months, the 50-day moving average has turned into a solid line of support for this stock. TWLO tends to rally in a big way, cool off, drop to the 50-day, and then bounce back. Right now, we appear to be in the “cooling off” phase. But, Twilio is still roughly 10% above its 50-day, so the technicals imply some room to fall in the near future.
Overall, while Twilio has robust long term upside, investors should exercise patience before buying in or adding exposure.
Bottom Line on Twilio Stock
Twilio stock belongs in the class of forever stocks to buy and hold for the long haul. But, buying or adding more here seems unnecessarily risk in the near term. It increasingly appears that a pullback is on the horizon. When that pullback happens, that will be the time to buy in or add more.
As of this writing, Luke Lango was long TWLO.
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