I am a strong advocate for paying attention to the message in price action. In this blog, I recount example after example of how and why price action matters for both short-term trades and long-term investments. One of my favorite suspects is non-confirming price action, especially when negative price action betrays good news. When a stock’s price moves opposite of expectations relative to significant news, I throw up yellow and red flags. This confounding price action suggests “someone” knows something, or at least someone with enough selling or buying power thinks they know something.
Earlier in the week, I demonstrated how Twilio (TWLO) confirmed my suspicions about previous good news. In this piece, I go into more detail on the telling price action. I add the mug shot of Fiverr (FVRR) to this line-up. Yet, while both companies delivered disappointing news that confirmed poor price action, post-earnings price action looks encouraging.
A Tweak from Twilio (TWLO)
As a reminder, on January 8th, Twilio (TWLO) announced a CEO transition. Perhaps in an attempt to reassure investors, the company bundled this news with upside guidance on Q4 earnings.
“Twilio expects to report fourth quarter 2023 revenue, fourth quarter 2023 non-GAAP income from operations, and fiscal year 2023 non-GAAP income from operations above the top-end of the guidance ranges it originally provided on November 8, 2023”
The increased guidance did not provide specific numbers, but the news was enough to send the stock higher by 6.7% for the day. From there, TWLO churned for the next five weeks going into earnings. During that time, TWLO only managed to close higher twice. The churn included a confirmed breakdown below support at its 50-day moving average (DMA) (the red line in the chart below). TWLO even confirmed 50DMA resistance going into earnings including a gap down. A 4.3% jump on earnings day failed to break through resistance. In other words, the price action going into earnings was ugly considering the earlier news. The churn undermined what should have been good news.
After reporting earnings, TWLO plunged 15.4%. On the surface, the “disappointing” news looked relatively minor. I have to assume that the increased Q4 guidance set up investors to expect a strong go-forward report. Instead, TWLO guided Q1 earnings slightly above “consensus expectations” and revenue slightly under consensus: $0.56-0.60 eps (earnings per share) vs. $0.55 and $1.025-1.035B in revenue vs. $1.05B. This low single-digits year-over-year revenue growth is consistent with a low price/sales ratio of 2.5 (it was as high as 36 at the peak!). Perhaps the real disappointment came from Twilio Segment – from the transcript of the earnings call:
“Twilio Segment is not performing at the level it needs to…Our Twilio Segment business, formerly Twilio Data & Applications, while still strategically important to Twilio, continues to underperform. Although we drove sequential bookings improvement in Q4, growth is not yet accelerating up to our expectations. We need to execute better and I believe that we can. Over the past five weeks, I’ve been working with the team to conduct an extensive operational review of Segment, and this work is ongoing. We plan to do a read-out of these results in March at which time I’ll be ready to share our findings, path forward, and any changes to Twilio’s financial framework as a result.”
Segment carries negative operating margins but was only about 7% of revenue in 2023.
Regardless the cause of the disappointment, the resulting selling confirmed the poor, non-confirming price action going into earnings. The surprise drove high-volume selling for another two days. Sellers finally exhausted themselves, for now anyway, after taking TWLO back to its last post-earnings close in November.
I see some good news in TWLO. The successful defense of support at the November post-earnings close puts the stock on my buy list to trade for a (dead cat?) bounce. My stop loss will be on a close below support.
An Error From Fiverr International Ltd (FVRR)
Fiverr International Ltd (FVRR) provides a worldwide online marketplace for freelancers. FVRR landed on my radar as I reviewed companies reporting earnings last week. FVRR looked suspicious with a confirmed 50DMA breakdown ahead of earnings. As I searched in vain for explanatory news, I noticed that Goldman Sachs (GS) upgraded FVRR on January 19th from neutral to buy with a $43 price target. FVRR gained 5.3% that day despite a fade from the highs. Buyers got active again the next trading day with a whopping 9.2% gain. While sellers quickly reversed those gains, FVRR held 50DMA support for almost three weeks. The churn higher included a breakout to 6-month highs. This price action seemed to confirm Goldman’s newly found bullishness.
Unfortunately, investors did a 180-degree turn and sold FVRR hard into earnings. The stock closed just below its post-upgrade close. The price action quickly flipped from a confirming to a non-confirming signal. After the company reported earnings, FVRR plunged another 14.2%. A rebound the next day only took the stock back to its lower Bollinger Band (BB).
Investors likely dumped FIVR because the company guided for Q1 and full-year 2024 below expectations. The good news side of this disappointment is that the company has a chance to deliver an upside surprise for full-year guidance in the next earnings report. The price action may not reveal anything ahead of time given some analysts rushed to downgrade FVRR. No word yet from Goldman.
Like TWLO, the selling in FVRR conveniently stopped around price levels from the last earnings report. Thus, I am also putting FVRR on my speculative buy list with a (tight) stop at a fresh post-earnings close.
Pay Attention to the Price Action!
Purists on the fundamentals act like price action does not matter. This negligence makes little sense to me. If someone projects rising earnings and revenues for a company while the stock trends down day after day and week after week, I will easily trust the price action over the analysis. The disconnect favors the price action because both time and resources are limited and precious. Why fight the market trying to prove the brilliance of an analysis no one else appears to be believe? As I am fond of saying, do not argue with sellers. Instead, celebrate with buyers. Just pay attention to the price action!
Be careful out there!
Full disclosure: no positions