Is Twilio Inc (TWLO) Stock A Good Buy Ahead Of Q1 2017 Earnings?

Twilio Inc (NYSE:TWLO) is scheduled to report its Q1 2017 earnings after the market close on May 2. Is TWLO stock a good buy ahead of earnings? Is Twilio Inc (<b><a href=''>TWLO</a></b>) Stock A Good Buy Ahead Of Q1 2017 Earnings

In-app communications specialist Twilio (NYSE:TWLO) is set to report its Q1 2017 earnings on Tuesday, May 02, after the bell. Shares of San Francisco, California-based cloud platform provider have been very volatile since making their spectacular debut last June. Given the wild swings, TWLO stock has marginally underperformed the Nasdaq Composite (INDEX:COMPX) since reporting Q4 2016 earnings. During this period, Twilio shares have risen by 6.07% compared to NASDAQ's 6.60%. The stock is up by almost 14% YTD. Things could have been much worse for Twilio investors had it not been for a ratings upgrade by Mark Murphy of JPMorgan in early April. Twilio has gained more than 16.5% since the rating upgrade. A big question which strikes investors now is: Will the upward march of the company continue going into Q1 earnings? Is TWLO stock set to soar higher after earnings? Or, will the earnings send the stock into another period of high volatility with more downside risk?

Wall Street estimates for Twilio's Q1 earnings release.

The average Street estimates for the cloud platform services provider is a Non-GAAP loss per share of 6 cents. Analysts expect revenue to come in at $83.6M. The company would be reporting Q1 earnings for the first time since going public. In the Q4 earnings call, Twilio had given a guidance of Non-GAAP loss per share of $0.07-$0.06 on a revenue of $82M-$84M for Q1. Analysts' revenue estimate implies a 41% YoY top line growth. The company had guided the base revenue for the first quarter to be in the range of $78M-$79M with a Non-GAAP loss from operations of $6.5M to $5.5M. The base revenue excludes revenue from "Variable Customer Accounts" with big customers who have never signed 12-month minimum contracts. All the numbers guided by the management were on 80 million weighted average shares outstanding. Post Q4 earnings one columnist had pointed out that the outlook is distorted by dilution of share count since the diluted shares outstanding of Twilio is much more.

The latest earnings would again have a spotlight on the company's heavy dependence on few big customers such as Facebook's (NASDAQ:FB) Whatsapp and Uber. Also, Whatsapp being a variable customer account puts Twilio in a tight spot. A reduction of weight on the company's top line from these players with good new customer growth will be seen as a welcome sign. Twilio has been a loss making company and is not expected to be profitable till 2018. So, the are expectations are all centered around impressive revenue growth and narrowing losses. The company cannot afford to disappoint on these two fronts.

Is Twilio stock set for a Short Squeeze?

Another crucial metric to monitor ahead of earnings is the Short interest in TWLO stock. The recent uptrend in the stock price has also seen a significant rise in the number of Twilio shares being shorted. The latest Short interest numbers indicate that there has been a 10.3% increase in Short interest of Twilio as of April 13. The number of shorted TWLO shares jumped to 16.97M shares, up from 15.39M shares at the end of the last reporting cycle (March end). It is also important to note that a massive 37.9% of the float represents shorted shares. The days to cover all short positions is five. An impressive earnings beat could send the stock much higher which in turn could give rise to a Short squeeze.

According to Investopedia, "A short squeeze forms when short sellers are forced to cover some or all of their positions by buying back the shares. Usually a short squeeze ignites on a large price, and volume spikes sparked by news or rumors. The unavailability of additional short shares traps the existing short sellers, causing forced liquidations from margin calls, which sets off another wave of buying to cover short positions." An impressive Q1 earnings and good guidance could be the ideal trigger for a Short squeeze. Also, on the contrary, the increase in Short interest also suggests an increase in the bearish sentiment around the stock. Many feel that share prices have gone up very high and it may soon correct.

Technicals at a glance ahead of earnings.

The recent upward surge in Twilio share price has resulted in multiple breakouts. Last week, in a bullish move the stock price made a breakout above its long-term 50-day SMA and 100-day SMA trendlines. Moreover, the Twilio shares have for the first time broken above the 100-day since going public. The 50-day SMA and 100-day SMA have acted as strong support levels to the stock since the breakout and Twilio shares have not closed below these crucial SMAs. However, there is a major red flag in the technicals with respect to Relative Strength Index(RSI) indicator. The RSI measure for TWLO stock is 87.93 well above the overbought threshold measure of 70. It clearly indicates that the stock is heavily overbought. Also, if one takes a look at the Twilio stock technical chart, the stock price is precariously close to the upper band of Bollinger Band indicator. The Bollinger Bands comprise of a 21-day SMA center line and two price bands (upper and lower) above and below the center line. A stock is deemed to be overbought if it breaches or touches the upper Bollinger Band. The present stock price stands very close to being in overbought territory as per Bollinger Band indicator as well.

Should you buy TWLO stock now?

The recent positive catalyst for Twilio (NYSE:TWLO) has been JPMorgan's Mark Murphy upgrading his rating from neutral to overweight. He has a price target of $36 a share. However, with the last close stock price being $32.84, the upside potential is limited to 9.6% with respect to Murphy's price target. Further, TWLO stock has more potential downside risk than upside potential, since any disappointment in the Q1 earnings results could send the stock tumbling. Twilio's earnings beat track record so far has been good. An impressive earnings outcome may well send the stock to higher grounds which would then perfectly set it up for a Short squeeze. Buying Twilio stock just ahead of earnings would be a risky bet. With a high probability of Short squeeze, it may turn out to be a high risk/high reward play.

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