What Happened:
Shares of cloud communications infrastructure company Twilio (NYSE:TWLO) jumped 5.1% in the afternoon session after stocks continued to rally, and both the S&P 500 and NASDAQ Composite made 52-weeks highs. This follows a dovish stance from the Fed after its monetary policy meeting. On December 13, 2023, the Federal Reserve maintained its key interest rate for the third consecutive time, holding it within the targeted range of 5.25%-5.5%. Additionally, committee members signaled a more dovish stance for 2024, anticipating at least three quarter-point rate cuts, roughly aligning with market expectations but more accommodative than Fed officials' previous statements. The market is focusing on this change.
The Fed Chair added that "Inflation has eased from its highs, and this has come without a significant increase in unemployment." This sounds a lot like the "soft landing" many market participants were hoping for, where inflation comes under control without damage to the economy that could hurt overall consumer demand.
In line with the Fed's assessment, on December 12, 2023, the Bureau of Labor reported a slight decline in inflation, attributed to lower gasoline prices and a general easing of price pressures in the U.S. The consumer price index (CPI) for November showed a 3.1% increase from the previous year (in line with market expectations), down from 3.2% in October, indicating ongoing disinflationary pressures.
As a reminder, lower rates are good for stock valuations, especially for tech companies where the market needs to discount back cash flows further out in the future. When the math is done to discount these cash flows back to today, a lower assumed discount rate leads to higher present values. After the initial pop the shares cooled down to $75.46, up 4% from previous close.
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What is the market telling us:
Twilio's shares are very volatile and over the last year have had 22 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 7 months ago, when the stock dropped 17.1% on the news that the company reported first-quarter results that narrowly beat analysts' revenue estimates. Earnings per share also beat. However the company missed gross margin and free cash flow estimates, cash burn increased, and net retention rate declined. Revenue guidance for the next quarter also came in below the Consensus, while EPS guidance was in line. Specifically, Twilio guided Q2'23 revenue growth to decelerate meaningfully to 4-5% from 15% in Q1 while reiterating its intermediate-term goal of 15-25% growth, which would require a strong re-acceleration. Additionally, management highlighted the focus on achieving sustainable profitability, adding that "we've structured the business with the aim of enabling Twilio to operate profitably in any financial climate and our first quarter non-GAAP income from operations is a strong signal of our ability to do so." Overall this was a worrisome quarter given revenue trends, which brings about questions about product-market fit, competitive dynamics, and pricing power.
Twilio is up 49.8% since the beginning of the year. Investors who bought $1,000 worth of Twilio's shares 5 years ago would now be looking at an investment worth $824.17.
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