Twilio's Stellar Run Has Come to an EndTWLO) has seen its shares appreciate over 100% since it went public in June 2016.
Given the high demand, it isn’t a surprise that Twilio has soared post-IPO. However, I think the stock has run up too high, and even though it is currently 15% lower from its all-time highs, I think Twilio is a great short candidate for several reasons.
The primary reason why I think Twilio is a short is the company’s overvaluation.
Twilio is currently losing money and is trading at 21.4 times trailing sales. In addition, analysts expect Twilio to remain unprofitable through fiscal 2017. The only thing that can justify Twilio’s losses is its sales growth. According to Yahoo! Finance, Twilio’s sales are expected to grow 28.5% in the next fiscal year.
Although the growth is impressive, it still doesn’t justify Twilio’s current valuation.
Clearly, Twilio’s fundamentals are stretched and, for some reason, the stock is more expensive than its peers that have similar growth pattern.
Image by geralt / Pixabay
In 2015, IPOs like Shake Shack (SHAK), and Fitbit (FIT) were very successful during the initial months. However, they soon reached the tipping point where investors realized that there’s no way for the respective companies to justify their valuations. And in my opinion, the same thing is currently happening to Twilio. With the stock already having declined 15% from 52-week highs, Twilio may soon enter a downtrend as there’s no justification for the company’s overvaluation.
Hence, I think investors can profit from its eventual decline by shorting the stock. Although I don’t expect Twilio to crash as much as Fitbit because the company’s offerings are clearly better, I do expect Twilio to correct at least 30% from current levels. Unlike Fitbit, I expect Twilio to not fall below its IPO price, but I still think the stock is a good short.
Given Twilio’s overvaluation and its growth estimates, I expect the stock to correct considerably in the coming months. It will be impossible for Twilio to justify its current price, and the stock will crash once the market realizes this fact. Thus, I think Twilio is a great short candidate.
Published on Sep 14, 2016By Ayush Singh