Twilio Inc. (TWLO) had long been on my most coveted list. Woulda, shoulda, coulda. I bought the shares the whole way up, waiting for a pullback that I thought I could trust.
We don't do woulda, shoulda, coulda here at Real Money. We try to capitalize on our hits, and we try to own up to our misses, and take another swing when we think it is right. For this trader, that opportunity came last week.
Twilio sold off in late July, then sold off again in early September with that powerful rotation. The shares sold off hard on Monday, the 9th, stabilized on the 10th, and I made my way into the name on the 11th.
As I incrementally re-engaged with some cloud names that I had abandoned, there would be room this time around for Twilio. Now, with the shares still roughly 25% off those summer highs, I have an ally in Morgan Stanley.
Morgan Stanley analyst Meta Marshall upgraded TWLO to "Overweight" from "Equal Weight" and jacked the price target to $135 from $130. That's still below most of Wall Street, but moving the right way.
Marshall sees the company building out their next-generation communications platform across multiple expansion markets "still in their infancy" (Their words). Marshall's view is that Twilio will continue to remove the constraints of traditional business to consumer communication, and sees these lower prices as opportunity.
The firm downgraded Twilio's direct competitor, Bandwidth Inc. (BAND) , to "Underweight" Thursday morning as well.
What I See
I see an elite level, cloud-based, business that offers developers the ability to build and scale real-time communications through the use of building blocks that ultimately connect clientele across different devices globally. This strategy might, in my unprofessional opinion, allow Twilio more optionality in pricing power should the competition ramp up their game in a total addressable market that TWLO management sees in the neighborhood of $66 billion.
I see revenue growth that has not slowed. For the quarter ended in June, the Twilio posted year-over-year sales growth of 86%, the sixth consecutive quarter of significant increases. Revenue generation came to more than $275 billion, which extrapolated across a full year might be impressive, but also leaves plenty of room if the addressable market estimate is even close.
The company, having posted positive numbers for adjusted EPS for five consecutive quarters, earned $0.11 for fiscal 2018, and expects to see $0.17 to $0.18 for full-year 2019, and $0.31 for 2020. These numbers include raised guidance put forth by Twilio in July.
Now, all is not buttercups and daisies to be sure. Gross profit margin has improved to 62%, yet operating margin and EBITDA margin have sunk to decisively negative levels. Net operating cash flow remains negative. That said, Twilio has cash and equivalents that dwarf total debt. Not only can this company meet its obligations (no need to look at current and quick ratios), it can do it out of pocket.
Lastly, let's go to Jim Cramer's "Rule of 40." Under this measure, you add a company's revenue growth percentage to its profit margin. A sum above 40% is a passing grade and below 40% means trouble could be ahead.
With Twilio's revenue growth cooing at 86%, even an EBITDA margin of -23% leaves this business with a score well above 40% (63), making Twilio, by this simplified metric, apparently a healthier software / cloud business than most.
The shares (hopefully) have formed a bottom. A 31.8% retracement of this summer's selloff would land the shares at $123, close enough to the stock's 200-day simple moving average to call that an intermediate target, as that spot will likely offer technical resistance. Even if that level is taken, there will be some traffic on the road as the August range is navigated.
My target price is $134, which basically means that Morgan Stanley has someone who can read a chart. Most of Wall Street, for your information, is still above $150.
I will likely add between $110 and $107. My panic point would be $99, or 8% below the recent low.