Cloud Communications Company Twilio's Future Still Appears Bleak

Once described as the future of cloud computing, Twilio (TWLO) is a pale shadow of its former self.

Shares of the company, whose cloud-based platform connects individual applications to users' phone numbers, have seen a massive plunge, with as much as 47.55% value eroded in just a month.

A combination of short selling, pressures of an imminent secondary offering and concerns over earnings have hurt the stock.

Heavy insider selling has aggravated the situation. The stock's fantastic run early this year after its initial public offering now seems like a distant dream.

In addition, the company still appears to be very far away from profitability.

Investors should avoid the stock for now.

Shares of Twilio went on a tear after its June IPO, and the company reported impressive second-quarter results that included revenue growth of 70%.

But then the bottom fell out. 

In the first week of October, Twilio filed a $400 million offering proposal. The sale seemed logical because sellers wanted to cash in on the 130% gains since the company's IPO.

By the time Twilio priced the offering at $40 a share, the stock was already under pressure. Many investors were disappointed by the fact that Twilio wouldn't gain a dollar from the offering, which was diluting equity.

Twilio's preliminary third-quarter results were largely overlooked, even though they appeared robust, showing a 56% gross margin, higher sales and a gross profit.

Short sellers began swarming around the stock as Twilio's price-sales ratio went to the high 20s. 

By comparison, Amazon trades at about 2.88 times price-sales, Facebook at about 17 times and Netflix at about 6.6 times.

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Some reports claimed that Twilio's shorted shares as a percentage of float as of Oct. 14 hit 67.67%

The insider selling also frightened investors.

Chief Executive Jeff Lawson sold 830,977 shares at an average price of $38.6 a share last month. Chief Financial Officer Lee Kirkpatrick also sold 69,740 shares, while James McGeever, a director, unloaded 72,861 shares, and General Counsel and Secretary Karyn Smith sold 13,863 shares, among others.

This could be blamed on the lock-in expiration or a plethora of other factors but investors just weren't comfortable with this avalanche of sales. If anything, the short-selling argument was strengthened by insider sales.

The stock's high valuation continues to be a negative. At a trailing 12 months' price-sales ratio of 13.6 times, Twilio remains an expensive proposition.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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