What a brutal six months it’s been for Bandwidth. The stock has dropped 30.1% and now trades at a new 52-week low of $12.28, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Bandwidth, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid BAND and a stock we'd rather own.

Why Do We Think Bandwidth Will Underperform?

Started in 1999 by David Morken who was later joined by Henry Kaestner as co-founder in 2001, Bandwidth (NASDAQ:BAND) provides thousands of customers with a software platform that uses its own global network to provide phone numbers, voice, and text connectivity.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Bandwidth grew its sales at a 15.1% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Bandwidth’s revenue to stall, a deceleration versus its 15.1% annualized growth for the past three years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

3. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Bandwidth, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Bandwidth’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 37.4% gross margin over the last year. That means Bandwidth paid its providers a lot of money ($62.60 for every $100 in revenue) to run its business.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Bandwidth, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 0.5× forward price-to-sales (or $12.28 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of Bandwidth

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