Even with a macroeconomic outlook that seems less certain than the past few years, I'm still particularly bullish on the enterprise software services sector that specifically focuses on helping small- to medium-sized businesses as a whole, suggests Matthew Timpane, senior market strategist for Schaeffer's Investment Research.
While I love many high-growth names such as Okta (OKTA), MongoDB (MDB), and Zendesk (ZEN), I'm particularly bullish on a mid-growth name that has a great technical, fundamental, and sentiment setup — Twilio (TWLO), which I believe could prosper in 2019 as it diversifies its customer base away from Uber, which was once 25% of its revenue.
In terms of innovation, Twilio has been busy. In 2018, the company launched general availability of Twilio Flex Roadmap, and pushed Twilio Pay, Autopilot, and Super-Sim out to public beta. Plus, the firm made strategic acquisitions of Ytica and SendGrid.
TWLO is estimated to grow revenues by 28% in 2019, with a robust 54% earnings per share (EPS) growth. While they are no longer considered "high-growth," per se, this EPS increase will be driven by a greater reduction in expense growth.
In a previous enterprise value (EV)/sales multiple contraction during 2014, mid-growth companies contracted 28% on average, while mid-growth multiples contracted by 31% in October 2018 alone. By comparison, both high-growth and slow-growth contracted by less than their respective 2014 levels.
Twilio's EV/sales multiple contracted to 8.38 during the October volatility, and is expected to grow to 10.07 over the next 12 months. That's still far below 14.85 over the last 12 months, which provides a better valuation for investors even at a higher stock price.
From a technical perspective, Twilio shares have rallied more than 250% year-to-date in 2018, as of this writing. However, I anticipate we could still easily see 50% to 100% share price growth next year as the company continues to expand.
TWLO is trading slightly below $90, which is six times its June 2016 initial public offering price (IPO) of $15. The shares are in an ascending triangle pattern with resistance around $97, and major support at $65.
Currently, the equity's 14-day Relative Strength Index (RSI) is around 50, which could be an area for TWLO to find a near-term bottom, as we so often see in strong, market-leading stocks. Despite the impressive price performance and high-level growth potential for TWLO, there's a significant amount of skepticism priced into the shares.
More than 14% of the equity's float is sold short, and that short-to-float ratio has increased over the past two reporting periods, even as the share price has appreciated amid broader-market turmoil. Likewise, the Schaeffer's put/call open interest ratio (SOIR) of 1.31 arrives in the 98th annual percentile, indicating short-term traders have rarely been more heavily tilted toward puts over calls on TWLO.
While I expect TWLO to continue to be volatile in 2019, especially with the potential macro conditions that have investors spooked, I expect that dips can be bought until the stock violates a larger trend, like breaking major support at that $65 level.
