What happened
Well, it's a new week, but the stock market is still looking a lot like it looked last week -- which is to say, "down." One stock, however, is defying the downturn and glowing green this afternoon. As of 12:55 p.m. ET, shares of cloud communications platform Twilio (TWLO +1.33%) are up a solid 2%.
You can probably thank Piper Sandler for that.
NYSE: TWLO
Key Data Points
So what
That's kind of surprising because in a note out this morning, the investment bank seemed closer to downgrading Twilio stock than to upgrading it. Citing near-term headwinds for the business, Piper Sandler cut $9 off its target price for Twilio, down to $113 a share. (The analyst did, however, maintain an overweight rating on the stock, according to ratings watcher The Fly).
How does that work, and why is Twilio stock up despite its price target being cut?
Well, in case you haven't noticed, Twilio shares currently sell for less than $70 a share. So while you might not think Piper's note today would be a "positive" for the stock, the analyst is still predicting that Twilio shares will rise 63% in price over the next 12 months, and that sounds like pretty good news.
As Piper observes, Twilio is a dominant force in the "communications-platform-as-a-service" market. In the near term, this "over-exposure to messaging" could weigh on the stock as Twilio's customers cut back on marketing expense. In the longer term, however, the company's strong market share in messaging should help it to outperform as the economy improves and advertising picks back up.
Now what
Patience may be required before that happens, however.
Although Twilio briefly became at least free-cash-flow positive in the heart of the pandemic in 2020, the company resumed burning cash last year, and the burn has only accelerated as 2021 rolled into 2022. Over the last 12 months, Twilio has racked up more than $209 million in negative free cash flow. It's unprofitable, too -- more than $1 billion in generally accepted accounting principles (GAAP) losses.
According to analysts, free cash flow could turn positive again as early as next year -- but not this year. Meanwhile on the income statement, it looks like nothing but losses as far out as the eye can see (or as far out as analysts are willing to venture a guess, which is to say, through 2024).
As fast as revenues are still growing for Twilio -- and they are still expected to grow 36% year over year in 2022 -- in the absence of solid profits, and in the current recession-fearing market, it's hard to see why Piper Sandler is so optimistic about Twilio stock's chances this year. The promise of a "63%" rise in share price seems to be attracting investors today, but once these investors start to realize how far away profitability still is for Twilio, I expect support for the stock will quickly fade again.
