Bandwidth: Sailing Higher On Strong Election Cycle Trends

seekingalpha11-04

Bandwidth has shown a notable turnaround in Q3 with a 28% y/y revenue growth, driven partly by election-cycle messaging, and raised its FY24 outlook.Despite recent gains, Bandwidth remains a value ...

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ATHVisions  So far, the Q3 earnings season has proven to be quite the turnaround quarter for a number of value-oriented, discarded growth stocks. Especially as we head into possible post-election volatility with an overheated S&P 500, I find these turnaround plays to be the best way to diversify against an expensive stock market. Bandwidth (NASDAQ:BAND) has had a notable turnaround this quarter. The communications software platform has seen a resurgence in net revenue retention rates (which we have to give election traffic some credit for), which has now helped the stock rise more than 30% year to date, especially with the recent post-Q3 rally. In my view, there’s further upside ahead. Data by YCharts I last wrote a bullish note on Bandwidth in August, when the company was still trading closer to $15 per share. Despite the recent post-earnings gains, I’m incredibly relieved by the company’s resurgence in growth and revenue retention rates. As a result, I’m reiterating my buy rating on Bandwidth. Worth noting as well is the fact that Bandwidth, with its latest results, raised its outlook for FY24. The company is now expecting stronger revenue growth at $737-$747 million for the year, or a 23-24% growth range. And for next year FY25, Wall Street analysts are expecting $761.3 million in revenue, or 3% growth against the midpoint of this year’s revenue range (estimates are likely to climb higher as Wall Street analysts digest the latest results and update their forward-looking models). Note that growth is expected to be more temperate next year as Bandwidth laps election campaign-related revenue this year.   Bandwidth outlook update (Bandwidth Q3 shareholder deck) Even in spite of the post-earnings rally, Bandwidth remains very much a value stock. At current share prices near $19, Bandwidth trades at a $514.4 million market cap. After we net off the $80.0 million of cash and $306.0 million of debt on Bandwidth’s latest balance sheet, the company’s resulting enterprise value is $740.4 million. This puts Bandwidth at just a 1.0x FY25 revenue multiple, and if we apply a 15% adjusted EBITDA margin against next year’s $761.3 million consensus revenue (consistent with YTD adjusted EBITDA margins, and resulting in $114.2 million in adjusted EBITDA), the stock also trades at a 6.5x EV/FY25 adjusted EBITDA multiple. Needless to say: these are bargain multiples for a software business that is restarting its growth engine. Beyond value, here’s a refresher on my full long-term bull case for Bandwidth:   Large $17 billion TAM. Bandwidth estimates its 2023 market opportunity at $17 billion (as cited in its most recent investor presentation), indicating that its ~$0.7 billion in annual revenue is only ~4% penetrated into this broad market.  Revenue re-acceleration is encouraging. Bandwidth is confident in its ability to grow in the mid-teens through 2026, finally outpacing its larger rival Twilio (which continues to cite headwinds from the crypto industry and its Segment subsidiary).  Land and expand with improving net retention rates. The company is achieving a net revenue retention rate that is now above 110%. In addition, average revenue per customer is growing ~10% y/y, both of which are a reflection of the company's ability to encourage greater customer usage over time.  Austerity measures have led to meaningful profitability gains. The company recently hit GAAP profitability,, and Bandwidth’s layoffs and focus on bottom-line efficiency alongside a disciplined growth path have allowed the company to generate substantially better adjusted EBITDA.  Stay long here and keep riding the post-earnings rally higher. Q3 download Let’s now go through Bandwidth’s latest quarterly results in greater detail. The Q3 earnings summary is shown below:   Bandwidth Q3 results (Bandwidth Q3 shareholder deck) Bandwidth’s revenue soared 28% y/y to $193.9 million, far surpassing Wall Street’s expectations of $182.0 million (+20% y/y) by a massive eight-point margin. The company did disclose that $8 million of its revenue this quarter (worth five points of y/y growth) was gained from election-cycle messaging. Even so, however, Bandwidth’s “organic” growth excluding political messaging (+23% y/y) accelerated versus just 19% growth in Q2 and is seeing incredible strength after falling to near-zero in the immediate post-pandemic era. We note as well that rival Twilio (TWLO), which had always dwarfed Bandwidth in absolute size terms and in growth rate, had also slowed to single-digit organic growth rates (before election-cycle bumps kicked in). We especially like the fact that net revenue retention rates (representing customer usage and upsell) saw a tremendous rebound in Q3, to 117%, up six points from 111% in the prior quarter and just 101% for all of FY23 (which essentially suggested that upsells were almost entirely offset by churn). Management also notes that political revenue only boosted retention rates by two points. The company’s ability to maintain 110%+ net retention rates next year will be a key watch item and a major upside catalyst for the stock if it continues to be sustained.   Bandwidth key metrics (Bandwidth Q3 shareholder deck) Management notes that the company continues to take market share while still expanding profit margins. On the Q&A portion of the Q3 earnings call, CFO Darryl Raiford noted as follows: So over the last several years, everyone has seen high quality profit growth out of our business model. And indeed, the model taking just this last quarter growing gross profit 22% on 15% revenue growth, growing our EBITDA to the extent that we did. We intend to keep extending that profit growth, whether there is a cyclical political campaign headwind or not. That is the -- that's the nature of our commercial business. It is taking market share and we're very pleased with that.” Adjusted EBITDA also nearly doubled y/y to $24.0 million, and margins climbed 6 points y/y to 17%. The company’s pro forma EPS of $0.43 in the quarter also smashed Street estimates of $0.32 with 34% upside. Risks and key takeaways Of course, it’s not all a clean path forward for Bandwidth. To me, the key risks the stock faces are:   Revenue deceleration post-election. Revenue will certainly decelerate post-election, but the question is by how much. It’s likely quite difficult to pinpoint exactly how much political messaging contributed to revenue and profitability (we take management’s estimate of $8 million or 5% y/y growth at face value, although there’s likely a big judgment factor in there), and trends could falter once this spending spree ends.  Macro headwinds. The macro environment continues to be nervous, which may prod Bandwidth customers to optimize their messaging spend on the platform.   That being said, I’m incredibly encouraged by the rebound in growth rates (even organically, excluding political traffic) and retention rates, and with the stock still trading at <7x adjusted EBITDA, I see much more upside than downside here. Stay long here and enjoy the rebound ride.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480580359"}