Twilio Stock Down 14% Today – Time to Buy TWLO Stock?

The price of Twilio stock is dropping more than 14% this morning in pre-market stock trading action following the release of the company’s financial results covering the third quarter of 2021 as the management guided for weaker-than-expected adjusted earnings per share for the upcoming fourth quarter of the year.

Revenues for the three months ended on 30 September landed at $740.2 million resulting in a 65% year-on-year jump for the software-as-a-service company while the figure exceeded Wall Street’s consensus estimate by nearly $60 million or 9%.

The company reported a total of 250,000 active customer accounts by the end of this quarter compared to the 208,000 it had back in September 2020. Meanwhile, international revenues accounted for a larger percentage of the firm’s total top-line results as they expanded to 33% – up from the 27% they represented back in Q3 2020.

Twilio’s non-GAAP profit margin expanded to 63% resulting in a 1900 basis points increase compared to the third quarter of 2020 while its non-GAAP operating income landed at $8.2 million resulting in a 1% margin. In absolute terms, this resulted in an increase in the firm’s operating income but, in relative terms, the margin dropped 100 basis points compared to the same period a year ago.

Finally, Twilio reported narrower-than-expected adjusted net losses per share of $0.01 compared to the minus $0.15 per share figure the Street was expecting for this quarter but it guided for net losses per share ranging between $0.26 and $0.23 for the upcoming fourth quarter of 2021. This range was 18 cents higher than Wall Street’s consensus forecast for Twilio’s Q4 adjusted EPS.

Can this weaker-than-expected guidance lead to the beginning of a downtrend for Twilio stock? In this article, I’ll be taking a look at the price action and fundamentals of the company to possibly answer that question.

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Twilio Stock – Technical Analysis

The price action for Twilio stock seems to be in consolidation mode since the stock hit its all-time high of $457 per share back in February this year, possibly as market participants are expecting more information from the company to assess if the pandemic tailwind that once lifted its results will continue to play a role in shaping its results in a post-virus scenario.

This consolidation is evidenced by a series of subsequent lower highs and higher lows posted by the stock since then and this resulted in the formation of a symmetrical triangle. This pattern is considered unbiased (not bullish or bearish per se) and can only provide a directional signal once the price breaks above or below it.

If this morning’s pre-market decline extends to the live session, the pattern will be resolved to the downside and that would push Twilio stock below its short-term and long-term moving averages.

At the moment, momentum oscillators are both favoring a mildly bearish outlook considering that the Relative Strength Index (RSI) has dived below 50 – currently at 49.1 – while the MACD has made a U-turn as it is dangerously approaching the signal line on the back of steadily decreasing positive momentum readings.

Such a decline would favor a bearish outlook for Twilio stock and the fundamentals may confirm this forecast depending on where valuation multiples are standing.

Twilio Stock – Fundamental Analysis

Twilio has been growing its top-line results at a rapid pace in the past five years at least, with revenues moving from $277.3 million back in 2016 to $1.76 billion last year at a compounded annual growth rate (CAGR) of 58.7%.

However, during that same period, the company’s negative GAAP operating margins have been deteriorating, moving from around 13% to nearly 25% last year while standing at minus 30% by the end of the past twelve months.

Net losses have also accelerated from $41 million in 2016 to $491 million last year and free cash flows remain negative as well.

Twilio’s balance sheet is quite robust as the company holds a long-term debt of around $1.9 billion on total assets of $13 billion including $1.5 billion in cash and equivalents and $3.9 billion in marketable securities. As a result, the firm’s tangible net assets per share stood at $37.35 accounting for around 13% of the pre-market quoted price of $295 per share.

Meanwhile, the firm’s forward P/S ratio is standing at 18x while its forward EV/Sales ratio is sitting at 17x. Both of these valuation multiples exceed the average for software and app developers by around 6 to 7 points.

As a result, Twilio stock may be poised to experience a sizable correction following this pre-market decline as the valuation seems outsized. Meanwhile, the firm is displaying some weak fundamentals – i.e. high negative operating margins and sizable net losses – that further reinforce a bearish outlook.

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