What happened
Twilio (TWLO 1.13%) fell 15.2% in February, according to data from S&P Global Market Intelligence. The company reported earnings on Feb. 9 that beat Wall Street's estimates, and its growth forecasts also impressed investors. However, the momentum from that earnings report wasn't enough to overcome the market forces that dragged tech stocks lower throughout the month.
So what
Correlated assets can tell us a lot about the forces behind a stock's movement. Twilio's February price chart was nearly identical to ProShares Ultra QQQ exchange-traded fund (ETF), which is meant to triple the performance of the Nasdaq Composite index.
TWLO and TQQQ Total Return Level data by YCharts
This clearly shows that Twilio stock is being influenced by the same supply and demand trends that are moving the market overall. Importantly, the similarity to the leveraged ETF shows that Twilio is more volatile than other popular tech stocks.
Image source: Getty Images.
Last month's move clearly wasn't a reflection of its fundamentals. The stock's price-to-sales ratio declined from 13 to 10.7, even though the company's growth forecasts improved. This is purely a shift in valuation rather than a shift in expected cash flows. Investors aren't willing to pay the same prices that were common just a few months ago.
TWLO PS Ratio data by YCharts
Now what
Twilio's fundamental case is strong. It's growing faster than 50% year over year, and it reported a net retention rate of 131%. That means that the company is attracting new customers, retaining a huge portion of its existing ones, and expanding on the relationships that it's built. Twilio also operates close to breakeven on a free cash flow basis, so it's not mowing through tons of cash to achieve its growth.
Unfortunately, investors will have to wait a few months for another chance at a strong earnings report. In the meantime, the stock will be at the mercy of a market that's losing momentum and punishing growth stocks. Twilio is still unprofitable, and its price-to-sales ratio is a bit higher than some of the established large tech stocks. That's likely to result in high volatility, and it could create buying opportunities for investors who are bullish about Twilio's long-term prospects.
