Bandwidth Inventory Q2: Amid Undue Pessimism, Now Is A Nice Time To Step In (NASDAQ:BAND)

The market has been in a foul temper this earnings season, with buyers promoting off development shares on fears of ineffective fee cuts and a weaker macroeconomy. Whereas near-term losses have been painful, it is a good time for buyers with sturdy stomachs and long-term oriented horizons to purchase undervalued shares at an ideal value.

Bandwidth (NASDAQ:BAND) is one such inventory. Although the corporate has actually required large persistence, there’s plenty of worth to be tapped right here for affected person buyers. The inventory has suffered a pointy 30%+ selloff since reporting Q2 outcomes, regardless of a beat and lift within the quarter plus different excellent metrics, like a rebound in dollar-based internet retention charges. Now up solely single digits for the yr and underperforming the broader markets, it is a good time for buyers to get into Bandwidth as a rebound play.

Deal with the long-term drivers for Bandwidth

I final wrote a bullish observe on Bandwidth in Could, when the inventory was buying and selling at more healthy ranges close to $22. Now considerably decrease regardless of a raised outlook for FY24 and bettering core metrics, I am perplexed on the disconnect with the market’s unfavourable response on Bandwidth, and I stay fairly bullish on this inventory going ahead.

Specifically, the 2 near-term elements that I am targeted on to assist a shorter-term restoration for Bandwidth are its latest paydown of debt, shoring up its steadiness sheet by placing a good reimbursement deal; in addition to the corporate’s bettering internet retention charges and double-digit income development (extra on this within the following sections).

However Bandwidth’s benefits additionally span past the close to time period. Here is a refresher on my long-term bull case for this firm:

• Giant $17 billion TAM. Bandwidth estimates its 2023 market alternative at $17 billion (as cited in its most up-to-date investor presentation), indicating that its ~$0.7 billion in annual income is just ~4% penetrated into this broad market.
• Income re-acceleration is encouraging. Bandwidth is assured in its capacity to develop within the mid-teens by way of 2026, lastly outpacing its bigger rival Twilio (which continues to quote headwinds from the crypto business and its Phase subsidiary).
• Land and broaden with bettering internet retention charges. The corporate is attaining a internet income retention fee that’s now above 110%. As well as, common income per buyer is rising ~10% y/y, each of that are a mirrored image of the corporate’s capacity to encourage better buyer utilization over time.
• Austerity measures have led to significant profitability good points. Although nonetheless not absolutely worthwhile from a GAAP perspective, Bandwidth’s layoffs and deal with bottom-line effectivity alongside a disciplined development path have allowed the corporate to generate considerably higher adjusted EBITDA.

Keep lengthy right here and use the near-term dip as a chance to purchase.

Shoring up the steadiness sheet

For many small/mid-cap tech corporations, the steadiness sheet hardly ever will get a lot consideration except a money-losing firm is about to expire of sources. In Bandwidth’s case, nonetheless, we will level to a latest debt reimbursement deal as an upside driver for this inventory.

As proven within the snapshot above, Bandwidth notes that it gained $63 million by repurchasing a big chunk of its 2026 convertible debt at a big low cost (we do observe that the corporate’s capacity to buy again debt at a reduction might sign its collectors’ jitteriness over Bandwidth’s prospects).

Bandwidth’s internet debt place has lengthy been a unfavourable separator between this firm and plenty of of its small/mid-cap tech friends, however with this deal, Bandwidth is transferring in the best course. On the finish of Q1, Bandwidth had a internet debt place of $272 million; after this deal, on the finish of Q2, Bandwidth had $76.4 million of money and $320.7 million of debt remaining ($40 million drawn on the corporate’s revolving line of credit score, and a remaining $280.7 million convertible debt steadiness), placing its internet debt place at $244.3 million, which is a sequential enchancment of practically $30 million – not small for a corporation whose market worth is simply over half a billion {dollars}.

Enhancing top-line metrics

And regardless of the post-earnings selloff, Bandwidth’s core enterprise seems to be displaying indicators of well being. Check out the corporate’s Q2 outcomes trended towards historic quarterly outcomes beneath:

Bandwidth’s income grew 19% y/y to $173.6 million, barely edging out over Wall Road’s expectations of $173.4 million. However maybe the extra significant result’s the truth that dollar-based internet retention (DBNRR) improved to 111% within the quarter, which is a four-point enchancment sequentially and a five-point enchancment on a y/y foundation.

Recall that weakening internet retention charges have been the important thing driver that precipitated Bandwidth’s sharp fall from share costs above $150 in 2021. As an organization that depends on its “land and broaden” enterprise mannequin, sequentially bettering internet retention charges are a core sign that Bandwidth’s clients are dedicated to increasing their utilization. We observe as properly that common annual buyer income improved 13% y/y to $198,000.

Furthermore: Bandwidth’s outlook for Q3 additionally requires a slight acceleration in complete income to $182 million, or 20% y/y development: one level higher than in Q2.

We anticipate that election-related messaging and promoting shall be a key driver of Bandwidth’s development within the second half of FY24.

Additionally of observe: Bandwidth’s adjusted EBITDA margin climbed six factors y/y to fifteen%, whereas nominal adjusted EBITDA leaped 76% y/y, pushed by a mix of the corporate’s ongoing headcount optimization efforts coupled with sturdy top-line outcomes and internet retention charges. We observe the truth that Bandwidth’s steering requires only a 10.3% adjusted EBITDA margin for FY24, primarily flat to FY23 margins, which can be fairly conservative contemplating Q1 got here in at a 12% margin (eight factors of y/y enchancment) and Q2 got here in at 15%.

Valuation and key takeaways

At present share costs close to $15, Bandwidth trades at a market cap of simply $587.0 million. After we internet off the aforementioned $244.3 million of internet debt on the corporate’s ending Q2 steadiness sheet, its ensuing enterprise worth is $831.3 million.

This sits at a 1.2x EV/FY24 income a number of and an 11.2x EV/FY24 adjusted EBITDA a number of, which is kind of modest contemplating the truth that the corporate’s outlook, notably on adjusted EBITDA margins, appears to be like prefer it has room to slip upward. Keep lengthy right here and leverage the post-earnings dip as a shopping for alternative.