Why Twilio Rallied Today

Why Twilio Rallied Today

Shares of this profitless growth tech stock rallied, likely on hopes for a good inflation report tomorrow.

What happened

Shares of cloud-based communications software platform Twilio ( TWLO 4.79%) were rising above the market on Monday, up 4.8% on the day.

There was absolutely nothing in the news to suggest a big move of this sort today; however, the stock has been decimated this year, as the market has been unforgiving to growth stocks that lose lots of money on their bottom lines.

With an eye toward potential deceleration in inflation numbers and new inflation data set to come out tomorrow morning, Twilio may be seeing an influx of buyers trying to front-run better economic news. So what

In the context of Twilio’s 72% decline in 2022, today’s 4.8% move higher is perhaps cold comfort to longtime shareholders. But is the move merely a dead-cat bounce or the start of a powerful new uptrend?

Much may come down to factors outside of Twilio’s control, such as inflation and the path of interest rates. As inflation has spiked coming out of the pandemic, the Federal Reserve has quickly raised interest rates, causing Twilio’s stock to be decimated. That’s for two reasons.

First, coming off the hypergrowth period of the pandemic, when cloud-based software saw a big pull-in of demand, growth is slowing now. Twilio’s revenue growth came in at 41% last quarter and 33% organic growth ex-acquisitions, but management forecast a deceleration to 30%-32% growth and 29% to 30% organic growth next quarter. The company’s net expansion rate, which shows how much existing customers are spending relative to last year, grew 123%, which is a solid number in isolation, but a big deceleration from the 135% rate a year ago and 127% in the prior quarter.

Second, higher long-term interest rates tend to depress the value of earnings that are further out. While Twilio soared during the ultra-low-rate environment of the pandemic, the 10-year Treasury Bond yield has shot up this year. Many investors use the 10-year note yield as a baseline to discount future earnings of companies, so a higher discount rate means a lower value in present-day terms, hurting all stocks that make little money today.

Not only does Twilio not make any money, but its losses ballooned last quarter, with operating losses of $311 million versus $202 million in the year-ago quarter. These are massive losses, even by the standards of the software industry, where many high-growth companies are losing some money on their bottom lines.

However, just as higher interest rates took down Twilio’s valuation so much, a reversal of trends could cause the opposite effect. That may explain today’s move, as tomorrow’s Consumer Price Index (CPI) report from the Bureau of Labor Statistics will be a key data point in parsing the near-term outlook for inflation.

High inflation has been the reason the Federal Reserve has raised rates so much, and many are optimistic, given the fall in gasoline and commodities prices in recent months, that inflation may be on a decline. That would be good for all high-growth, profitless stocks like Twilio. Now what

Is Twilio cheap at these beaten-down levels? That’s a very tough question to answer. On the one hand, the company has a very strong cash position, with about $4.4 billion in cash against just a little less than $1 billion in debt. Twilio trades at a $13.8 billion market cap now, good for a multiple of just four times sales, and just three times sales on an enterprise value basis .

That’s definitely cheap on a sales basis, but with Twilio’s $1.2 billion run-rate of operating losses, it’s difficult to know exactly when it will be profitable, and how profitable it may ultimately be. One concern is that its gross margins were just 47.2% last quarter, which is far below other software companies that usually have gross margins in the 70% to 90% range.

Therefore, while Twilio may turn around and rise from these beaten-down levels, there are still very valid concerns with the company, even at these prices. While today’s bounce gives investors a hint of the potential upside from lower inflation, it’s also possible inflation could be more persistent than some expect. Therefore, investors should tread carefully in considering Twilio, even though it seems like a bargain after a tough year. Should you invest $1,000 in Twilio Inc. right now?

Before you consider Twilio Inc., you’ll want to hear this.

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