Cloud communications provider Twilio (TWLO -2.35%) has been one of the hottest stocks on the market in the past six months, clocking incredible gains of 94% as of this writing thanks to the company's improving growth profile, as well as the incredible addressable market it can tap.
The good part is that Twilio stock remains attractively valued even after the impressive gains that it has delivered in recent months. Buying it still looks like a no-brainer, considering that it is on track to take advantage of the growing adoption of artificial intelligence (AI) in the communications platform as a service (CPaaS) market. Twilio trades at a reasonable 26 times forward earnings, which is a discount to the Nasdaq-100's earnings multiple of 32 (using the index as a proxy for tech stocks).
So, investors who have missed out on Twilio's recent surge can still consider adding this stock to their portfolios. However, there is another cloud communications stock that's cheaper than Twilio and has been growing at a healthy pace in recent quarters: Bandwidth (BAND -0.06%).
Let's look at the reasons those looking for an alternative to Twilio might consider buying Bandwidth stock, even though it has underperformed during the past six months, staying flat.
Bandwidth's healthy growth points toward better times
When Bandwidth released its third-quarter results in October it reported an impressive 28% year over year increase in revenue to a record $194 million. What's more, its earnings per share (EPS) nearly doubled to $0.43 in the quarter from the year-ago period's $0.23.
The company's growth in the last-reported quarter suggests that it is stepping on the gas. The midpoint of Bandwidth's most recent revenue projection of $737 million to $747 million would translate into a 23% increase from 2023 -- and up from an earlier forecast of $700 million at the start of 2024. Additionally, analysts expected its EPS to increase by almost 64% in 2024. The strong adoption of the company's cloud communications tools explains why it increased its annual forecast as the year progressed.
Bandwidth's average annual customer revenue of $212,000 in Q3 2024 was up by 20% from the year-ago quarter, not surprising considering that existing customers increased their spending on Bandwidth's offerings. More specifically, Bandwidth's net retention rate increased to 117% during the quarter from 104% in the same quarter last year. This metric compares the revenue generated by the company's customers in a quarter to the revenue generated by the same customer cohort in the year-ago period.
So, a reading of more than 100% is an indication that Bandwidth's customers have either increased their usage of its solutions or have adopted more of its offerings. This improved customer spending explains why Bandwidth's earnings growth was substantial in 2024. A similar trend could unfold in 2025, considering that the company estimated its addressable market opportunity at $17 billion in 2023, indicating that it could be at the beginning of a terrific growth curve.
These catalysts explain why Bandwidth carries a 12-month median price target of $22, which would be a 34% jump from current levels. However, don't be surprised if the stock delivered stronger gains beyond 2025 as well.
The valuation and the potential upside make this cloud stock worth buying
Analysts on average expect Bandwidth's earnings to grow 14% in 2025 to $1.55 per share. However, the estimates for 2024 and 2025 have moved higher of late.
BAND EPS Estimates for Current Fiscal Year data by YCharts
The chart also tells us that analysts expect Bandwidth's earnings growth to accelerate in 2026. Assuming that's indeed the case and its EPS jumps to $2.21 in 2026, Bandwidth's stock price could more than triple to $58 (based on the Nasdaq-100's forward earnings multiple of 26.4).
Given that Bandwidth is currently trading at about 23 times forward earnings right now, investors are getting a good deal on this tech stock; it's not just cheaper than its peers, but it's also trading at a discount to rival Twilio.
So investors looking for a growth stock that's trading at an attractive valuation would do well to take a closer look at Bandwidth, considering the potential upside it may offer.
