TWLO

Twilio (TWLO) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

We've seen this show before. In 2000, unrealistic expectations eventually burst, sending the Nasdaq down almost 80%.While growth scarcity and lower discount rates justify higher prices, many stocks currently trade at huge valuations.The recent 30% drop caused by Fastly's 5-6% revenue guidance hints at the risks growth investors are taking.History repeats itself. While money can be made riding a bubble, investors should remain humble and take actions to mitigate downside risk.

Twilio is a winner in the B2C communication and engagement market. The company has seen runaway momentum this year, mostly in its share price. Higher valuations make me very cautious, although I really appreciate the increasing strength of the business, including its most recent acquisition.

Fastly stock is crashing, and this seems more like a temporary setback than anything else.Reduced guidance is probably backward-looking information because of the uncertainty affecting TikTok in recent months.The stock is back to levels from only 15 days ago.Competitive strength and expansion into both security and edge computing are the main drivers to watch going forward.Based on the data currently available, I see no reason to sell Fastly, and I would consider buying more if the stock keeps going lower in the middle term.

(Bloomberg) -- Software stocks have been among the best performers of 2020, juiced by revenue growth related to stay-at-home measures and lofty expectations for future gains. But a blowup at cloud provider Fastly Inc. served as a stark reminder of how some of those hopes may prove misguided.Fastly plummeted as much as 31%, its worst session on record, after a revenue warning for the third quarter rebutted a growth narrative that had made the company the fifth-best performer in the Russell 1000 Index this year. While some of the weakness was related to geopolitical tensions and its exposure to TikTok owner ByteDance, Fastly also warned of reduced revenue from other customers.Fastly’s slowdown highlights the precariousness of lofty software valuations. Massive share plunges are the price paid when these businesses fall short of perfection. Software stocks have been among the year’s leaders, with an S&P index of software makers up more than 43% in 2020, topping even the 31% gain of the S&P 500’s tech index.This “dramatic outperformance” is creating some valuation risks, according to Mizuho Securities, which recommended clients take “a more surgical approach to stock selection.”Many cloud-based software makers, including Zoom Video Communications Inc., Twilio Inc. and Okta Inc., saw product usage spike when businesses moved to work remotely at the start of the pandemic. But many companies haven’t seen enduring demand surges to match Zoom’s, where quarterly revenue jumped 355% in the period ended in July, the second consecutive period of triple-digit sales growth.Some cloud companies are balancing a pickup in demand from large enterprise clients that are insulated from the pandemic against a drop-off in purchases from cash-starved small- and mid-sized business that have reduced spending. Disclosing even mixed results, let alone a miss, usually means paying a steep price. Slack Technologies Inc. shares lost 14% of their value the day after reporting disappointing quarterly billings in September. PagerDuty Inc. plunged about 26% one day last month after projecting revenue that fell short of Wall Street estimates.Among Fastly peers, Limelight Networks dropped 5.1% on Thursday while Akamai Technologies was off 4%. B Riley said that Fastly’s issues were unlikely to be seen across the sector.Walter Pritchard, an analyst at Citi, noted that even with Fastly’s sell-off, shares were trading at a multiple he called “unsustainable, especially with reduction in growth rate.” In a bear-case scenario for Fastly and other content-delivery networks, “even 10x sales could be hard to justify.”Fastly’s price-to-sales ratio of 35 stands out even in the software industry. The ratio is more than three times the average in the S&P North American Expanded Technology Software Index. By comparison, the S&P Information Technology sells for about 6.5 times sales, while the Nasdaq 100 is at 5.1.While many Fastly analysts continue to see rosy long-term prospects, especially as the pandemic accelerates the use of cloud computing and streaming video, they were caught off guard by the latest warning. At least two firms downgraded the stock, including Stifel, which wrote that due to Fastly’s “premium valuation and uncertain core organic growth, we expect the stock to meander in coming quarters.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

Twilio's share price has seen a parabolic rise in 2020.Irrespective of the business's strong share price growth thus far, there will be more growth to come.Twilio's strong competitive position, pandemic acceleration, and developer love are just some of the reasons I continue to stay long this business.

By Christiana Sciaudone

The management team at Twilio announced the company's decision to acquire Segment in a deal valued at $3.2 billion.This all-stock transaction should help the company to expand into new market segments and will ensure that it is strengthening its core value proposition.The structure of the transaction and the market-leading position Segment has makes this seem like a solid deal for investors.