We also used a reasonable FCF yield of 2.5% by FQ2'26, based on an FCF margin of 2%. Anything lesser is not worth our consideration. We used a higher than average hurdle rate appropriate for a typical growth stock.īut, we think a 25% hurdle rate is pretty reasonable for a "high-growth" player like TWLO. Our reverse cash flow valuation model laid bare just how overvalued TWLO stock seems. TWLO stock reverse cash flow valuation model. Unless a company can prove its profitability, it will be challenging to value it using a fundamental analysis framework. We have learned from our past mistakes with revenue multiples and will not repeat them. We should use its revenue multiples, right? But, of course, some investors would tell us we are using the wrong metric. Using its NTM FCF yield and normalized P/E, we don't think any rational investor can value TWLO stock accordingly. What has Twilio's leadership in its space amounted to? If it cannot generate robust FCF with its leadership, we find it challenging to envisage how it can improve its FCF margins moving ahead. It only emphasizes the company's weak operating leverage, despite its story thesis. However, having an FCF margin estimate of 1.1% in FY23 is nothing to shout about. The consensus estimates suggest that Twilio's FCF profitability should improve as it seeks to achieve non-GAAP operating profitability by 2023. Because Twilio is still struggling with generating free cash flow profitability. However, we urge investors to be cautious with using this approach. Street analysts and management prefer to use its adjusted profitability metrics to parse Twilio's underlying performance. Twilio adjusted EBIT margins % and FCF margins % consensus estimates (S&P Cap IQ) Moreover, we don't think TWLO stock can recover to $200 anytime soon unless its FCF profitability improves markedly. The story is good, but the underlying metrics are terrible.Īs such, we reiterate our Hold rating on TWLO stock. Without sustainable FCF, Twilio investors need to ask themselves what they are investing in. Therefore, we believe that the pummeling of TWLO stock is justified. ![]() Its weak free cash flow (FCF) profitability is a critical concern. ![]() So instead, we need a double bottom and nothing less.įurthermore, our valuation analysis suggests it's incredibly challenging to value TWLO stock. Moreover, given its dominant bearish bias, we wouldn't even be keen on a "normal" bear trap reversal price action in TWLO stock. Notably, we have not observed any potential double bottom bear trap that could help stanch its steep decline. Our most updated price action analysis suggests that its near-term bottom has been breached and is no longer valid. However, there has been a material and significant development in its price action over the past month. We highlighted in our previous article that the risk/reward profile was still unattractive, despite its massive collapse. We follow up on our post-earnings article on Twilio Inc. ![]() Jaanalisette/iStock Editorial via Getty Images Investment Thesis
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