How do you value these Tech Stocks ?

TWLO was down a lot today, and I thought: what do they do? Why is it down so much? What is its conservative value? What price makes sense for a risk averse buyer?

A snapshot of the financial statements shows a great balance sheet and a lot of profitless growth.

TWLO just reported Q1. Kind of breakeven, but who knows? Non-GAAP EPS was breakeven, but down from the $0.05 in the year ago quarter. Not the kind of growth worth paying for. Active customer accounts of 268,000 was up 14% from the March quarter a year ago - nice growth but really not in line with their "dollar net expansion rate" of 127% in the quarter. What is dollar net expansion rate anyway? Common sense dictates that this company's upside growth limit is 14%, in-line with the active customer count growth. Sure they can upsell existing customers, but that has limits. On a revenue multiple, it appears fairly valued at 4X the estimated 2022 revenues and even cheaper versus the 2023 revenues. That said, how is TWLO going to make significant money?

The more it grows, the more the song stays the same: slightly negative cash flow with exploding share count. Remember, this company is expected to do almost $4 billion revenue this year but they can't throw off cash? Not a good sign. In fact, it appears that TWLO will have difficulty ever generating higher than a 15% operating margin, but that is probably a huge stretch. Warning flags should be raised when revenue for the March quarter is up 48% y-o-y but non-GAAP gross margin contracts 200bps to 53%. They shouldn't need non-GAAP gross margins in their press release and it looks like they are buying bad growth. With G&A of 10%, R&D of 18% and non-GAAP sales & marketing of 25%, what can they cut ? TWLO shouldn't grow revenues 48% and outspend that - this is fine if they are cash flow positive, but they are not.

Either its a tough industry or its a management team that is not in the cash flow mindset. Look at the exploding share-count. Frankly, we don't exactly know how to value this one. On the high side, you could say that the company is worth 20x potential earnings of $1 billion ( which would be a 15% margin on $6.7 billion of revenue) on 200 million shares giving an upside case of $100 per share ( you could add the $20 in cash to get a $120 target). But on the low side, this company could be worth one times the $7 billion in revenue plus $15 in cash to give a downside case of $50.

In December 2019, TWLO was $100, and the stock is quickly round-tripping towards that value. Only the first few months and last few months of the graph above provide any valuable reference point. When a company has been growing a long time and there is no cash flow, valuation becomes difficult. Valuation is always difficult without cash flows, but TWLO has met its growth targets but has not produced any shareholder value.

Can you imagine the conference calls back in 2016 or 2017 when revenues were $2 billion lower and it was a small cap company ? Surely management was saying that they can do 20% operating margins once scale is achieved. We didn't listen to this weeks conference call, but you can bet that management is now saying that this is a land grab and they have to buy the growth before the competition, invest in R&D and that the company would be solidly profitable without such a successful expansion. That story worked great for Amazon, not so much for everyone else including Netflix.

The covid lows provide one of the most interesting reference points here. With an upside target of $120 and a downside target of $50, you could start getting interested in TWLO as a long in the low 70s. The September $70 Puts are $4.00 - this suggests that the $70 price is somewhat realistic as a potential entry point - these options are pricing an 11% probability that this can happen.

We think that the current market turmoil is a great time to build out a radar screen of stocks like this. If it has a 10% chance of hitting the good entry point, a radar screen of 20 names is likely to deliver 2 excellent long ideas between now and September. Five months is not too long to wait.

Remember, if you can't value it or if its confusing, move onto the next name. There are thousands of names out there.

You could listen to the street, who are "experts" at valuation. Here is what the street said about TWLO today (all these news items on May 5th):

• UBS price target down to $210 from $310

• Oppenheimer target down to $320 from $380

• Barclays target down to $175 from $250

• JP Morgan target down to $200 from $290

• Cowen price target down to $250 from $300

• Needham target down to $200 from $350

• Piper target down to $220 from $270

• JMP target down to $250 from $510 ( $510 ? )

• CFRA maintains strong buy (aren't they accounting guys ? what about the shares & non-GAAP?)

The Street was wrong on this name: don't believe them now. Nine "good" analysts and none of them have been even close to correct? C'mon. At $200 with 200 million shares in the near future, this company would be back in the 10x revenue range - forget it - not happening. And, if it does somehow get to $200, you can short it or sell OTM calls.

Right now, the only trade we see is selling the September $70 Puts for $4.00 but we would wait for another downdraft tomorrow or Monday as the market is manic and almost anything can happen. This trade becomes minimal risk in the event that the $50 puts trade to $4 in a crash on Monday. Missing a put sale is no big deal but doing a bad one is....