Bandwidth (NASDAQ:BAND) delivered better-than-expected numbers when it released its third-quarter earnings report on Nov. 8, crushing Wall Street's estimates by a comfortable margin thanks to the growth in its customer base and an increase in spending by existing customers.

Share prices for the cloud communications platform-as-a-service (CPaaS) provider have severely underperformed the market so far in 2021, crashing 48% -- but it looks like a turnaround may be in the cards, as investors cheered the latest report. Bandwidth's stock price jumped nearly 3% after earnings, and it wouldn't be surprising to see them head higher and close the year strongly. Let's look at Bandwidth's Q3 numbers and check why it remains a solid bet on the fast-growing cloud communications market.

Man and woman looking at a laptop screen.

Image source: Getty Images.

Bandwidth delivers solid numbers, once again

Bandwidth's Q3 revenue increased 54% year over year to $131 million, exceeding the company's guidance range of $123.6 million to $124.6 million and the consensus estimate of $126 million. The company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) increased to $14.2 million from $9.3 million last year, while non-GAAP earnings increased by a penny to $0.25 per share. Wall Street expected Bandwidth to earn $0.09 per share.

The CPaaS segment accounted for 82% of Bandwidth's revenue during the quarter, recording 46% year-over-year growth thanks to an increase in the adoption of the company's offerings. This is evident from the jump in Bandwidth's customer count and a bump in spending.

Bandwidth's count of active CPaaS customers increased 57% year over year to 3,173, while its dollar-based net retention rate was up 108%. The dollar-based net retention rate is an important metric that compares the CPaaS revenue in a quarter to revenue from the same customer cohort in the year-ago period. The increase in this metric means that Bandwidth's existing customers are using more of its services or have adopted new products from the company. The higher the dollar-based net retention rate is over 100%, the better.

It is worth noting that Bandwidth's sales in the year-ago period were boosted by pandemic-related tailwinds, which led to an increase in companies adopting its solutions to connect with their remote employees. A bump from political messaging during last year's presidential election also increased its revenue in the third quarter of 2020. Excluding these one-time gains recorded last year, Bandwidth's normalized dollar-based net retention rate stood at 113% in the third quarter of 2021.

More importantly, Bandwidth's dollar-based net retention rate looks set to move higher thanks to deeper customer engagements. The company pointed out in its earnings release that one of its largest customers scaled up the deployment of Bandwidth's services to a global level, compared to select countries earlier. Bandwidth explained that the stronger customer engagement was a result of the Voxbone acquisition that it closed in November last year, which gave the company a global reach.

So Bandwidth is benefiting from cross-selling opportunities arising out of its Voxbone acquisition last year, which should continue to drive an increase in spending by its customer base. Not surprisingly, the company has bumped its full-year earnings guidance. It expects to finish the year with adjusted earnings between $0.74 and $0.78 per share, up from its earlier expectation of $0.71 to $0.75 per share.

Why investors should consider buying the stock

Bandwidth's 2021 earnings are on track to increase 38% from last year, while the revenue guidance of $480.5 million to $485.5 million points toward a 41% increase in the top line at the midpoint.

Additionally, Bandwidth could sustain its impressive growth in the long run, as the CPaaS market is slated to grow at an annual pace of 34% through 2026, according to Mordor Intelligence. So Bandwidth is growing at a faster pace than the end market, which makes buying the stock a no-brainer given its valuation.

The stock is trading at 4.6 times sales, which is a massive discount to peer Twilio's (NYSE:TWLO) sales multiple of 19.7. Twilio's third-quarter revenue increased 65% year over year to $740 million, while adjusted earnings declined to $0.01 per share from $0.04 per share in the year-ago period. Twilio also delivered terrific guidance that calls for 39% to 40% revenue growth in the fourth quarter, which means that it is on track to finish the year with a 57% increase in the top line over 2020.

Bandwidth's growth may not be as strong as Twilio's, but it is still quite impressive. Also, investors shouldn't miss the fact that they can buy Bandwidth at a much cheaper valuation and add a fast-growing cloud stock to their portfolio without having to pay such a premium.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.