Bandwidth Inc.'s (NASDAQ:BAND) Price Is Right But Growth Is Lacking After Shares Rocket 27%

Bandwidth Inc. (NASDAQ:BAND) shareholders have had their patience rewarded with a 27% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 5.4% isn't as impressive.

Even after such a large jump in price, considering around half the companies operating in the United States' Telecom industry have price-to-sales ratios (or "P/S") above 1.3x, you may still consider Bandwidth as an solid investment opportunity with its 0.7x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Bandwidth

How Bandwidth Has Been Performing

Bandwidth certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Bandwidth will help you uncover what's on the horizon.

How Is Bandwidth's Revenue Growth Trending?

In order to justify its P/S ratio, Bandwidth would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. Pleasingly, revenue has also lifted 45% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.0% during the coming year according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 102%, which is noticeably more attractive.

In light of this, it's understandable that Bandwidth's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Bandwidth's P/S

Bandwidth's stock price has surged recently, but its but its P/S still remains modest. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Bandwidth's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Bandwidth you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.