Twilio (TWLO): 2019 Top Picks' Mid-Year Update

07/18/2019 5:00 am EST

Focus: TECHNOLOGY

Matthew Timpane, CMT

Senior Market Strategist, Schaeffer's Investment Research

Matthew Timpane, a technical analyst and contributing editor to Schaeffer's Investment Research, chose Twilio (TWLO) as his favorite idea for 2019. The stock has since risen 53%. Here's his latest update.

Following our naming of Twilio as our Top Pick for 2019, the last 12 months enterprise value-to-sales (LTM EV/Sales) has remained on track as we expected. The company guided toward 45% organic growth during the fourth-quarter earnings report, with 25% organic growth from the SendGrid acquisition.

Additional shares from the secondary offering of 7.01 million shares of its Class A stock at $125 per share at the end of May, along with an underwriters' over-allotment of 1.05 million shares, should have little effect on the underlying fundamentals, and should not be viewed as a material change to its growth outlook. 

Option implied volatilities (IVs) on TWLO have imploded this year, which is typical when coming out of a volatile broader market environment and as the company matures. But while implied volatilities have died down in 2019, the stock has become a steady "trender" as it consistently beats expectations.

And lately, Twilio has been lighting up our bullish quantitative screens. TWLO just pulled back to its 40-day moving average, and nine prior signals of this type have yielded average 21-day returns of +6.57%, with 89% positive. The stock is also meeting up with its supportive 80-day trendline, and six prior pullbacks to this level have delivered 100% positive returns after five days, with an average return of +8.74%.

While the security has already delivered a great return, as long as the long-term trend remains intact above key levels — including the round $130 region, the 20-week moving average around $131, and the 50% year-to-date return at $133.95 — we see no reason why the shares can't continue to grind higher through the end of the year.

That's especially true since we're in the typically bullish third year of the presidential cycle, which often results in a positive fourth quarter. What's more, a short squeeze contributed to the TWLO rally this spring — and we could once again be setting up for a bout of short-covering activity.

The short interest-to-float ratio stands at a lofty 12.25%, having jumped higher in recent reporting periods with little effect on the security. The average price of these shorts is $108.47 per share, so they remain strongly underwater, and could soon be forced into covering their losing bets.

That said, we do expect some resistance at $150 for TWLO. This area is 10 times the initial public offering (IPO) price, and corresponds with a psychologically significant $20 billion market cap. As such, this will be a tough level to break through, and an area we will want to watch for the trade stalling out.

A consolidation period between $130 and $150 through October is likely, in my opinion, but could present a buying opportunity for those that took some profits. And if TWLO does make it through $150, we have a runway to much higher levels.

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