Twilio Inc. (TWLO) is a dangerous stock for investors. The company may have a long-term upside, and the company has rallied 300% since its IPO price of $15 two months ago. Initial investors made a lot of money, but the underlying fundamentals make this a risky stock.
The company’s revenues are soaring, up 70% annually as reported last quarter, with $64.5 million in revenue. User growth accelerated 45%, too, which is a bright spot for the company. Strong growth may make this a smart long-term investment, but the company’s overvalued price should be a red flag for investors.
Three reasons we view this as a dangerous stock are:
1. Twilio Trades at 22 Times Trailing Sales
Twilio may have a bright future ahead of the company, but the stock is trading at 22 times its trailing sales. In the application software industry, the average P/S ratio is 5. Compared to other companies in the industry, Twilio’s ratio is too high for a company that doesn’t turn a profit.
2. Revenue Forecasts Are Slowing
The company’s revenue forecasts are impressive, but they’re lower each year, causing concern. The company’s revenue increased by 88% in 2015, with expectations of a 52% – 54% increase in 2016.
3. Limited IPO Shares Offered
Twilio will grow, but the company’s future is still uncertain until profits begin to flow into the company. An interesting move by the company was to offer just 10 million shares at the time of their IPO.
A limited supply of stock caused a frenzy in a market with high demand.
The momentum the stock achieved was, in part, due to the limiting in the number of shares offered. Investors afraid to miss out on the stock purchased it despite inherent risks. The first day of trading, the stock soared 91.9% to close at $28.79. The IPO was $15 a share.
The company posted a net loss of $35.5 million in 2015.
