3 Worries About Twilio Inc (TWLO) Stock

It’s actually not easy to find faults with Twilio Inc (NYSE:TWLO). The company was spot-on when it launched back in early 2008, when cloud computing and mobile apps were ready to take off. Since then, the company has continued to add critical features to its communications platforms, such as voice, messaging and video. It also helps that TWLO stock has a solid business model, which is focused on getting buy-in from developers.

The result is that the customer base has been quite loyal.

So yes, growth has been torrid as well. In the latest quarter, revenues shot up 62% to $71.5 million and the net loss was a reasonable $11.3 million, down from $12.4 million in the same period a year ago. TWLO has marquee customers like Uber, Facebook Inc’s (NASDAQ:FB) WhatsApp and Airbnb

Is it any wonder that TWLO stock has a hefty market cap of $3.5 billion? Of course not.

Yet this does not mean that Twilio stock is a no-brainer investment opportunity (hey, what stock really is?) The fact is that there are some clear issues that can cause problems.

So let’s take a look at three:

Twilio Stock Risk No. 1 — Growth Path

For any new-fangled tech company, there is usually a stall in growth. TWLO stock is certainly vulnerable to this — and it could come sooner rather than later.

One factor is the presidential election. True, part of this is the uncertainty about immigration. No doubt, for a company like TWLO, there is a big-time need for highly skilled talent — and many top engineers are not U.S. citizens.

Although, this may be a side issue. If anything, there is something else about the election that could have a much bigger impact: CEO indecision. Given that much still needs to be fleshed out about Donald Trump’s policies, the inclination is to hold off on making IT purchase decisions.

Keep in mind that TWLO has already been making a major shift in selling to larger enterprises, as seen with new offerings like the Twilio Enterprise Plan. And so, revenues could get lumpy, which will likely weigh on the valuation of the stock.

Twilio Stock Risk No. 2 — Customer Concentration

It’s not uncommon for early stage companies to have a large proportion of revenues come from a small number of companies. Yet it does pose potential risks. If just one of the companies terminates a contract — or fights for a tougher negotiation on terms — there can definitely be an adverse impact on the top line.

Unfortunately, this is real potential threat for TWLO. Consider this from the company’s latest 10-Q Filings: “We currently generate significant revenue from our largest customers, and the loss or decline in revenue from any of these customers could harm our business, results of operations and financial condition.”

About 31% of revenues come from TWLO’s 10 largest customers. And among these, two represent 23% of revenues.

Oh, and many of these customers do not have long-term contracts. Instead, the fees are based on usage. So if there is a slowdown in economic growth, then there could be a hit to revenues for Twilio Inc.

Twilio Stock Risk No. 3 — Valuation

Since coming public in late June, TWLO stock has been on a rollercoaster. The shares quickly shot up from $15 to $71. But during the past month or so, things have gone in reverse. The Twilio stock price is now around $38.

Such wild swings are normal for IPOs, especially for hyper-growth companies. But even with the steep plunge, the valuation on TWLO stock is still at premium levels, fetching a price-to-sales ratio of 13X. Keep in mind that New Relic Inc (NYSE:NEWR) is at a much cheaper 8X and Box Inc (NYSE:BOX) sports a multiple of 6X.

Something else: On Dec. 20, the lockup provision will expire. This means that insiders will be allowed to sell their shares. While this does not mean there will be an avalanche of dumping of TWLO stock, there could still be meaningful pressure. After all, many insiders could be more encouraged to take profits because of the volatility.

If so, the bear move on Twilio stock may not necessarily be over — at least for the near-term.

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