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Is Twilio Inc (TWLO) Stock Headed For A Massive Short Squeeze?

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Twilio Inc (NYSE:TWLOstock gained more than 15% yesterday on the back of a report of expanded partnership with Amazon.com, Inc. (NASDAQ:AMZN). Short squeeze ahead?

Shares of San Francisco-based Twilio Inc (NYSE:TWLO) skyrocketed yesterday after a story broke out about an expanded deal with Amazon.com, Inc. (NASDAQ:AMZN). Twilio stock jumped more than 15% yesterday, closing at $34.59 for the day. While the massive jump has shareholders excited, the shorts are a worried lot. Twilio is a very heavily shorted stock. In the latest reported period, the short interest came in at a massive 46% (1) of the float, more than 10 million shares were shorted.

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Short interest in Twilio has seen a consistent increase since its listing with the total number of shorted shares increasing by around 500% since July! In the latest reporting period, total shares shorted jumped by 13%. According to a Fortune report, the short interest had already reached 100% in October. Every share which could be borrowed was shorted. Twilio had to make available another 7.5 million shares to infuse liquidity. However, the expiration of lock-in period for insiders on 20th of December has expanded the float and brought down the short interest to 46%.

Such a bearish outlook was vindicated by more than 50% fall in the shares price since late September. But yesterday’s jump and the positive outlook will force many shorts to take cover, which could lead to a short squeeze. Already many are hedging their bets. According to a report on Schaeffer’s investment research, the shorts are already active in the options market, buying call options. To quote from the report (2):

“At last check, nearly 16,500 TWLO options had traded — almost three times what’s typically seen at this point in the day — with 12,150 calls on the tape, versus 4,300 puts. Most active is the weekly 12/23 30-strike call, where it seems safe to assume new positions are being purchased. In other words, call buyers expect TWLO stock to extend its surge north of the strike through this Friday’s close, when the weekly series expires”. “Considering TWLO is a heavily shorted stock, it’s certainly possible that some of this recent call buying is a result of short sellers hedging their bearish bets against any upside risk.” 

It was not only the options market which saw heavy volumes, even in the delivery market, the volume was double of the usual. However, considering that the days to cover is just 2 days, and the expiration of the lock-in period will increase the float size, the impact of the short covering on the stock price will be lower.

The Amazon Deal And Price Target Upgrade

The rally in Twilio stock was caused by a report from Benzinga.com (3) which said that Twilio is expanding its partnership with Amazon.com. In July, Amazon had already partnered with Twilio to send SMS through Amazon Simple Notification Service. The new deal will expand the partnership to voiced based notification for clients. If the deal goes through, it will be a big win for Twilio. The deal will not only generate additional revenue but also help the company’s brand image. Twilio is a PaaS company which provides cloud-based messaging platforms to businesses and counts the likes of Uber, Coca-Cola, and Netflix as its customers.

Twilio also got a boost from a buy rating by Drexel Hamilton analyst Brian White. Brian White has a buy rating with a price target of $45, 30% upside from yesterday’s close. He expects the company is likely to generate one of the fastest sales growth next year. According to him, the stock is undervalued:

We analyzed high growth companies (seventeen companies) of the past and the EV/NTM sales ratios ranged from 9x at the trough to 22x at the peak in the first three years after going public. Twilio completed its IPO in June 2016 or approximately six months ago at $15.00 and the stock is trading at an enterprise-value-to-revenue ratio of just 6.3x our CY:17 estimate (and 4.9x our CY:18 estimate) or approximately 70% of the trough levels for this group of high growth companies and 29% of peak levels. 

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