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Forget Twilio, This Stock Is a Better Buy Right Now

By Harsh Chauhan - Mar 6, 2021 at 7:15AM

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This cloud communications specialist can turn its fortunes around after a weak start to the year.

The massive growth in demand for communications-platform-as-a-service (CPaaS) in the wake of the novel coronavirus pandemic has sent Twilio (TWLO 7.49%) stock soaring. Shares of the cloud communications specialist have performed well in 2021 despite the recent sell-off, and they look all set to deliver more upside thanks to terrific business momentum.

However, Twilio peer Bandwidth (BAND 8.69%) has fared less well after a strong start to the year. The stock has dropped nearly 29% over the past month, losing all the gains that it had recorded in the early weeks of 2021.

But savvy investors looking to take advantage of the lucrative CPaaS market now have a chance to buy a rapidly growing company at an attractive valuation. This is an opportunity growth-oriented investors won't want to miss, as Bandwidth looks all set to build upon its terrific 2020 performance. Here's why.

BAND Chart

BAND data by YCharts.

Bandwidth is about to get better in 2021

Bandwidth recently delivered solid results for Q4 2020. Its revenue shot up a whopping 82% year over year to $113 million during the quarter, outpacing full-year 2020 revenue growth of 48%. Bandwidth finished 2020 with total revenue of $343.1 million, 87% of which was from the CPaaS segment.

The company's CPaaS revenue jumped 51% for the full year and 84% in the fourth quarter. Bandwidth also delivered adjusted net income of $0.55 per share for the full year -- a big turnaround compared to the adjusted net loss of $0.23 per share in 2019.

Bandwidth's 2021 guidance suggests that it is on track to sustain its rapid growth rate. The company expects total revenue of $108.5 million in Q1 at the midpoint of its guidance range, which would translate into a 58% increase over the prior-year period's sales of $68.5 million. The CPaaS business is expected to account for more than 89% of the company's revenue this quarter.

The full-year guidance is also impressive. Bandwidth has forecast revenue between $460.4 million and $464.4 million this year, which translates into a 35% increase over 2020 at the midpoint of the range. However, don't be surprised to see the company exceed its full-year expectations thanks to a mix of higher customer spending and a bigger customer base.

Finger touching a red buy button on a keyboard

Image source: Getty Images.

Bandwidth's customer base has increased sharply following its acquisition of Voxbone. The company finished the fourth quarter of 2020 with 2,848 active CPaaS customers -- up 65% from the year-ago period -- which includes the addition of 700 Voxbone accounts. But the more important metric to note is Bandwidth's dollar-based net retention rate, which stood at 133% in Q4 as compared to 113% in the same period a year ago. That figure was not impacted by the Voxbone acquisition last quarter.

Bandwidth management explained that the "dollar-based net retention rate compares the CPaaS revenue from customers in a quarter to the same quarter in the prior year." The expansion in this metric means that the company's existing CPaaS customers spent more money on its offerings. The addition of Voxbone should ensure further growth in Bandwidth's dollar-based net retention rate thanks to cross-selling opportunities.

For instance, Bandwidth's existing customers can choose to buy Voxbone's telecom application programming interface (API) solutions. Additionally, Bandwidth can pitch its own offerings to Voxbone customers. All of this indicates that Bandwidth can maintain a high dollar-based net retention rate in the coming quarters and that could drive better-than-expected revenue growth at the company.

Why now is a good time to buy

Bandwidth's dip has made the stock cheaper. It is now trading at a price-to-sales ratio of 9.2, which is substantially lower than the P/S ratio of 15 toward the end of December.

BAND PS Ratio Chart

BAND PS Ratio data by YCharts.

What's more, Bandwidth's current P/S ratio is lower than the average 2020 multiple of nearly 12.7. Twilio, for comparison, trades at nearly 33 times sales. This makes Bandwidth stock look like a bargain right now, especially considering that its first-quarter sales growth could be better than Twilio's.

Twilio recently guided for a 45.5% year-over-year increase in revenue for Q1 2021, which is slower than Bandwidth's estimated 58% growth this quarter. As such, investors looking to buy a cheaper alternative to Twilio should consider Bandwidth, as it not only trades at a relatively attractive valuation but also seems to have the potential to become a top growth stock once again this year.

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Stocks Mentioned

Bandwidth Inc. Stock Quote
Bandwidth Inc.
$23.14 (8.69%) $1.85
Twilio Inc. Stock Quote
Twilio Inc.
$108.37 (7.49%) $7.55

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