Twilio (TWLO) cut to Reduce as HSBC sees 'significant downside risk'

On Tuesday, Twilio Inc. (NYSE: TWLO) was downgraded by HSBC from a "Hold" rating to "Reduce." Accompanying this downgrade, the firm also lowered its price target for the company's shares from $62 to $61.

HSBC has shifted its valuation approach for Twilio from Price to Sales (P/Sales) to Price to Earnings (P/E) ratio. This change reflects what HSBC describes as Twilio no longer being a high-growth, no-profit company. they believe it now exhibits a lower growth rate. According to HSBC, Twilio's current valuation is steep compared to other companies with similar growth profiles in the sector, especially when assessed using non-GAAP (Generally Accepted Accounting Principles) valuation metrics.

Twilio is expected to continue incurring losses through 2028, as projected by GAAP-based metrics. HSBC suggests that the market's perception of Twilio may evolve, with investors starting to consider share-based compensation and recurring one-off costs as regular expenses due to the company's slower growth. This is a departure from the current trend where many investors overlook these costs when calculating non-GAAP metrics.

The firm believes that there is a considerable downside risk to Twilio's share price if the investor sentiment shifts towards a stricter adherence to GAAP metrics. This would lead to a reevaluation of the company's actual financial health, potentially impacting its stock value.

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