40% From This Cloud Stock

I may not like it. In fact, I really don’t like it. At all. Because I’m old and grumpy. But as an investor, I understand branding.

I get that analysts or companies themselves feel the need to take boring initiatives or strategies and snazz them up into super-cool sound bites. Like when Cramer noticed that Facebook, Amazon, Netflix, and Google were all rallying, and suddenly we had FANG. Amazing! FANG! Buy, Buy, Buy!

Then some a-hole (Cramer again, actually) wanted to kick it up a notch, and we got FAAA — Facebook, Amazon, Apple, and Alibaba. Sweet! FAAA! How do you even pronounce that? Is it like “Fa loves Pa” from Day of the Dolphin? Maybe it’s like, “My head’s gonna FAAA-ckin explode if I hear any more stupid acronyms!”

Or when your refrigerator can “see” that you’re low on milk and texts you a message to buy more, or your thermostat monitors electricity pricing so it turns the AC off during peak pricing — it’s just not cool enough to say that appliances can connect to the Internet to operate more efficiently. We have to have the “Internet of Things.” This one’s even got its own cool abbreviation — IoT — and I’m sure there’s a gung-ho trade association with nifty “I ♥ IoT” hats and t-shirts…

“If we drill down and get really granular on this, it changes the calculus.” Ugh.

So it is with a heavy heart that I write today. Because I’m going to talk about a “cloud” stock. I know, I know. And I apologize in advance. It’s not that I want to, really. I’ve avoided this day like the plague. But sometimes there is opportunity that just can’t be ignored. 

Get Your Head Out of Your… Clouds?

Yeah, so, the cloud. We couldn’t just call it the Internet. Apparently that word’s no good anymore. You can’t just provide software on the Internet. That’s too easy to understand. It now has to be “in the cloud.” So, you know, it can be mysterious and new. 

Anyway. I should move on…

Have you ever wondered how you can access the apps on your phone so quickly and easily, while accessing the Internet directly is so time consuming? 

Well, companies like Twilio (NYSE: TWLO) are the answer. Twilio is a cloud (ugh) stock that provides the bridge between popular apps and cell phones. If you want to access Uber or Facebook Messenger on your phone, you are using Twilio’s service. 

Twilio had a very successful IPO in June of 2016. The stock closed at ~$29 that day and launched all the way to $70 by early September. The bottom fell out, and the stock has fallen all the way back to $29. 

Yes, Twilio shares got a little ahead of themselves. And when the company announced a secondary offering at $40 back in October, the stock price plunged from $46 to $30 in three weeks. Ouch. 

The stock has stabilized around $30. And if you check the far right of that chart, you can see the share price is getting a little frisky. That’s because the growth is still there: revenue rose 88% in 2015 and is likely to be up another 62% for 2016 and 54% in 2017. But investors are still on the sidelines because insiders will be allowed to sell their stock as of last Tuesday, December 20. 

Don’t Fear the Lockup

It’s common for a company to keep its employees and founders from selling their stock for six months after an IPO. This is known as a “lockup period.” Investors have a tendency to think that corporate insiders will dump a ton of stock on the market at the first opportunity and that the price will fall further. 

However, these fears are usually overblown. Yes, insiders will likely sell some stock. But they are unlikely to simply dump shares at any price. Insiders know their business better than anyone. And if they think there is upside to business, are they simply going to dump all their stock? 

No, probably not. And in fact, insiders might even leverage their shares and buy more stock. 

An analyst at Drexel just upgraded Twilio and put a $45 target on it. Here’s a bit from his report: 

Already, next-generation companies [editors note: did he really just say “next-generation companies”? Couldn’t he just say “new?” Well, at least he didn’t say “unicorn”] have been attracted to the benefits to the Twilio, including Uber, Airbnb, Box, Netflix, Salesforce, AWS, Hulu, OpenTable and many more. The CEO of Uber (Travis Kalanick) has described the positive experiencing of switching to Twilio from a competitor solution as “I sleep easier, my engineers sleep easier.” There are also a host of traditional companies using Twilio to be more competitive, including Home Depot, Coca Cola Enterprises, Dell Technologies, Nordstrom, Sony, Duke University, ING…

Regardless, I think there is some solid upside for Twilio from around $30 a share. A quick move above $40 is not out of the question. So, feel free to take a speculative position in Twilio (NYSE: TWLO) under $33.

Until next time,

Briton Ryle

@BritonRyle on Twitter

An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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