On Wednesday, KeyBanc increased the price target for Bandwidth Inc. (NASDAQ:BAND) shares to $32.00, up from the previous target of $21.00, while maintaining an Overweight rating.
The adjustment comes after Bandwidth reported a robust first-quarter performance for 2024, surpassing expectations largely due to increased spending on digital communication services by its existing customers.
The company's Messaging business, which accounts for approximately 23% of its first-quarter revenue, experienced a significant 49% year-over-year growth. This was fueled by a 34% increase in Commercial messaging and an unexpected early surge in political messaging revenue.
When removing surcharges and political revenue from the full-year 2024 projections, adjusted revenue growth is anticipated to accelerate to 9% from the 4% seen in 2023, reaching an estimated $522 million.
KeyBanc's new price target of $32 for Bandwidth is based on 2.4 times the adjusted sales metric for the calendar year 2024. The firm also notes the potential for an increase in this multiple, highlighting that the free cash flow positive software cohort typically trades at approximately 7 times.
Bandwidth has reaffirmed its guidance for over $50 million in free cash flow for the calendar year 2024 and aims to continue improving its gross margins, with a target of a 100 basis point increase over the previous year.
The growth in Bandwidth's gross margin is partly attributed to the shift towards software products like Maestro and Direct to Enterprise, which represented 6% of the first-quarter revenue and boasted a gross margin of around 70%, compared to the adjusted gross margin of 56.5% for the same period. The company's software and messaging segments grew by 20% in the first quarter of 2024.
KeyBanc underscored the ongoing healthy trends in digital communication, particularly in Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS), which are increasingly driven by artificial intelligence.
Bandwidth, with its primarily usage-based business model, stands to benefit from these trends and is expected to continue its strategic focus on expanding gross margins and free cash flow. This ongoing success supports KeyBanc's Overweight rating and the raised price target on Bandwidth shares.
InvestingPro Insights
Bandwidth Inc. (NASDAQ:BAND) has demonstrated a strong growth trajectory, which is reflected in both its recent performance and the expectations for the future. According to InvestingPro data, Bandwidth's market cap stands at $604.32 million, with a significant revenue growth of 9.43% over the last twelve months as of Q1 2024. The company's gross profit margin during the same period was a robust 38.86%, indicating a healthy ability to convert sales into profit.
InvestingPro Tips highlight that Bandwidth's net income is expected to grow this year, which aligns with the positive outlook presented by KeyBanc. Additionally, the company's liquid assets exceed its short-term obligations, suggesting financial stability and the potential to weather short-term market fluctuations. It's noteworthy that analysts predict Bandwidth will be profitable this year, reinforcing the optimism around the company's financial health.
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