Twilio: Overhang To Pressure Stock

| About: Twilio (TWLO)


Twilio announced pricing of 7 million secondary offering.

Insiders made a clear signal with the willingness to dump shares far below the stock price when the offering was originally filed.

The stock faces upside resistance with the overhang of these insiders still controlling a large amount of shares.

After the close on Thursday, Twilio (NYSE:TWLO) confirmed the pricing of the secondary offering. Considering the weakness in the stock, the completion of the secondary was a negative outcome for shareholders.

Source: Twilio presentation

Amazingly, the stock traded at $70 only last month. Now, insiders are willing to dump shares at significantly lower prices providing a clear signal to shareholders.

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The company originally filed for a potential secondary of up to $400 million nearly two weeks ago. Twilio closed that week above $60 leading to my recommendation to not only sell the stock, but question why people hadn't already sold.

The secondary of 7.0 million shares priced at $40.00. The company is only selling 641K shares with selling shareholders dumping the rest. In addition, the over allotment shares amount to another 1.05 million shares for a total of 7.4 million shares offered by insiders.

As with most of these secondary deals, the selling shareholders are only dumping a fraction of their holdings. In this case, Bessemer Venture Partners is only dumping 3.0 million shares out of 20.5 million shares held by the firm. The private equity firm still has another 17.5 million shares to unload in the future.

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Source: S-1/A page 138

Interestingly, Union Square Ventures decided to not sell any shares. Oddly though, the CEO unloaded 831K shares and along with directors were responsible for the majority of the shares sold.

One very important point is that selling shareholders are not required to complete these offerings, if the price isn't acceptable. In the case of Sprouts Farmers Market (NASDAQ:SFM), the insiders consistently sold on regular intervals at constantly lower prices. A prime example of how investors shouldn't consider the Twilio secondary as the lowest price the insiders are willing to sell.

In the case of Twilio, the sellers were still willing to dump the shares after a roughly 33% drop in the stock price in less than two weeks. The answer to that riddle is simple.

Twilio guided to meager revenues of only $255 million for this year. Even at $40, the stock value still tops $4.0 billion with over 100 million outstanding shares. Even the analyst estimates for revenues of $332 million for 2017, the stock trades at P/S multiple of 12.

The key investor takeaway is that is that slightly above $40 is likely the resistance level going forward. If these shareholders sold at this price, the hangover if the stock price rises much above these levels will be significant.

The biggest mistake investors make and why so many people probably still hold the stock from the highs is misunderstanding the situation. Too many blow off these secondary offerings as justified moves my management or private equity firms to cash out some big gains. While this is true and nobody can blame these firms or individuals, the real question is why you want to be the person buying the shares they are dumping.

The recommendation remains to stay far away from Twilio until the insiders sell more shares and the stock valuation turns more reasonable. Remember, in the Sprouts example that the stock now trades at $21 far below where the insiders were selling at prices above $30.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.