Twilio and Its 65% Upside Going Into Q4

Key Points

• There are signs a recovery rally is in the making. 
• Piper Sandler sees at least 65% upside in shares. 
• The technical setup is attractive for an entry.

Despite an 80% drop in share price over the past year, we could be looking at a diamond in the rough with Twilio (NYSE: TWLO). True, it hit a fresh 2-year low last week, but there are signs, both from a fundamental and a technical point of view, that suggest a Q4 rally could be in the making. 

The San Francisco based company sells a customer engagement platform and was one of the tech darlings of the pandemic. Having trended up in the years beforehand, their shares went near vertical for much of 2020 and the early part of 2021. But it’s been a quick trip back to earth for investors that didn’t cash out, with shares effectively back at 2016 levels right now. However, for those of us who love a recovery story and don’t mind a bit of risk, read on. 

Bullish Comments 

It was just over 2 weeks ago that the team at Piper Sandler reiterated their Overweight rating on Twilio shares, with a fresh price target of $113. Analyst James Fish said some of their customers could be planning to cut their marketing expenses given the weak economic environment, but the company's recent restructuring and refocus would benefit it over the long haul. He recognized the near-term damage that could come about because of this, but focused on the longer-term potential when reiterating his team’s position. 

In a note to clients, he wrote "positively, the over-exposure to messaging will help Twilio continue its communications platform-as-a-service market share dominance despite near-term headwinds, the company is returning towards its "developer-first" roots for the core and still pushing AppServices in a profitable manner, CDP is a top consumer experience priority, and Twilio will begin to show more material profitability in 2023.”

Considering shares have only dipped lower in the fortnight since that targeted upside has only got juicier. We’re now looking at a move of around 65% for shares in order for shares to hit that, and the 8% jump seen in yesterday’s session is a sign of what they might be capable of. 

Behind the fundamental drivers, we also have a bullish technical setup starting to emerge. Given it’s being created after a multi-month downtrend, there’s a decent degree of risk involved but this is looking like one of those opportunities where the reward more than justifies it. The lows that shares have hit in the past week are right along the same $70 level that they bounced off during the worst of the COVID sell-off back in March 2020. It’s also where the bears ran out of steam during the weakness seen in October 2018. So if the remaining bulls are going to pick a point at which to make the proverbial last stand, there are few better places to pick than right here.

Getting Involved 

If shares can use yesterday’s hop to leave the $60-70 zone decisively behind, there’s a strong argument for them to tick back up to the high $80s which is where they spent much of the summer consolidating. The past two months have been tough for almost every equity out there, and in a way, this is opening up rare buying opportunities for those of us on the sidelines. Like with many of the stocks we’re writing about these days, you have to be thinking that the worst-case scenario has been baked into the share price. 

If our readers are tempted to dip their toe in, there are some easy places to work to stop losses for a quick exit if the bounce doesn’t generate momentum, while to the upside there’s a ton of room to run before shares might even start getting tired. The stock’s RSI is still only moving up through the 40s, suggesting it’s still coming out of extremely oversold conditions, while the MACD is about to turn positive. Let’s see if the broader market sentiment continues to improve into the weekend and if it lights a fresh fire under Twilio.