Sometimes a market wound too tight makes strange moves. That happened yesterday. And it's probably going to continue over the next few weeks.
We heard from a few BMR subscribers wondering what happened to Twilio (TWLO: $112, down 10%). You weren't alone. A lot of investors were asking the same question. After all, Twilio didn't admit to any sudden upheavals. Nobody downgraded it or even had anything unflattering to say.
Our profit projections have come up a staggering 70% since the last time the stock receded to this level. You read that right: Back in February, Twilio was $112 and investors were fine with the notion that it was going to earn $0.10 per share throughout 2019. Now it's much more likely that we'll see at least $0.17. Likewise, the revenue outlook has climbed an extra 4% over the last seven months to feed that accelerated profit trend. We're now looking for 70% growth on the top line and 55% on the bottom.
That's part of why Twilio is up 25% YTD, rallying a lot faster than the S&P 500. But if the fundamentals have improved that much, the only reason the stock would go in reverse boils down to shifts in the world outside the company. It's not them, in other words. It's other investors who have changed. Sentiment around high-growth / high-multiple stocks needs to regroup. The market is looking for surer bets and above all else. income to replace plunging Treasury yields.
Twilio is not a sure bet or an income play. While we love the company for its long-term potential, we aren't blind to the relationship between low interest rates, risk and truly dizzying valuations on relatively small stocks. Low rates translate into higher multiples because investors have easier access to cash to funnel back into fast-growing stocks.
And when rates look a little more likely to stop falling, valuations can hit a wall of worry fast. We suspect that's what happened yesterday. The mood around the economy brightened just enough that the odds of another rate cut on September 18 receded fractionally . . . not much, but enough to lift rates. When that happened, investors looking forward to easy money ahead reevaluated their risk profile.
Ironically, a slightly better read on the economy triggered a fresh pivot out of the stocks best positioned to thrive in that kind of environment. That's just how twisted the mood is right now. When it unwinds, we're confident that Twilio will be a $150 stock again.
And the fact that it isn't just Twilio that's hurting right now feeds that confidence. Look at our big losers yesterday: Exact Sciences (EXAS: $109, down 10%), Universal Display (OLED: $211, down 6%) and most of the Aggressive group. These stocks led the market up this year. Some like Alteryx (AYX: $120, down 15%) have more than doubled in the last eight months. Even the once-unstoppable Roku (ROKU: $161, down 5%) felt the drag.
The only thing these stocks have in common is high growth rates to support high multiples. Despite the theories some people tried to put forward, there's no crisis in "Cloud stocks" . . . otherwise Exact Sciences wouldn't take the hit. This is simply a pullback from high multiples as the rate environment gets a tiny bit less forgiving. (By definition high multiples magnify the impact of any deviation from expectations, so even a 1% lower chance of a rate cut in two weeks can have a double-digit impact on the stock.)
But the thing about companies growing this fast is that every day takes the fundamentals closer to the point where the multiples look less precarious. Twilio, for example, will be booking 70% more sales at the end of the year than it did eight months ago. That's fast enough to overcome a lot of glitches along the way. And it's definitely enough to climb the wall of worry once Wall Street remembers how stocks like this work.