Canaccord Says These 3 Communications Software Stocks Are Down but Not Out, Forecasting up to 160% Upside
2023 will go down as a vintage year for the stock market but not all have enjoyed the spoils. For instance, it has been a difficult ride for many companies operating in the communications software space.
This is acknowledged by Canaccord analyst Michael Walkley, who notes that it has been a challenging year for the majority of companies under his coverage in the communications software group. It has been particularly hard for smaller cap stocks with debt and especially net debt.
But as every savvy investor knows, often the best time to lean heavily into a stock is when sentiment is severely depressed. And with the new year at the gate, there are now some good-looking opportunities in the sector.
“While several of these stocks underperformed in 2023, we believe many of these stocks have priced in near worst-case macro and company specific issues, and the long-term risk-reward is quite attractive,” the 5-star analyst explained. “Should the Fed start to ease in 2024 leading to better availability of money and a rally in smaller cap stocks, then we list [the] stocks we believe are well positioned for upside in 2024 and beyond.”
With this in mind, we decided to take a closer look at 3 stocks that are down significantly this year, but which Walkley thinks are in no way out. In fact, he sees ample upside for all 3, even forecasting gains of ~160% for one. For a fuller view of these stocks’ prospects, we also ran them through the TipRanks database. Let’s check the results.
Bandwidth (BAND)
We’ll start with Bandwidth, a cloud communications software company with a global footprint, offering a range of services to enterprise customers, including voice calling, text messaging, and emergency communications. In short, Bandwidth is a full-serve communications-platform-as-a-service firm, putting business clients’ worldwide communications on a secure footing through a reliable subscription service.
The company’s Communications Cloud covers more than 65 countries, which together account for more than 90% of the world’s GDP – from its users’ perspective, Bandwidth can provide communications everywhere that counts. On the company’s customer list are such major names as AWS, Cisco, Google, and Docusign. Bandwidth backs up its services with solid support teams, and boasts that its platform lets customers solve their most complex communications challenges, for unparalleled reach.
Secure, reliable communications are essential in the modern digital business environment, and that’s reflected in Bandwidth’s financial performance. Over the past several quarters, the company has consistently beaten expectations on both revenues and earnings. Nevertheless, the company’s stock is down some 40% year-to-date.
That dissonance can be traced back to February of 2023, when Bandwidth reported its Q4 and full year numbers for 2022. At both levels, the company beat expectations – but management’s guidance for the full year 2023 failed to impress. The company predicted $580 million in revenues for the full year 2023, or essentially flat year-over-year performance vs. consensus at $613.13 million.
In the company’s last report, for 3Q23, the top line showed $152 million, up 2.7% year-over-year, and $2.9 million over the forecast. At the bottom line, EPS came to 23 cents, or 3 cents per share better than had been expected.
Looking ahead for this global communications company, analyst Walkley thinks its prospects are sound. He writes, “Following slower growth trends during 2023 driven by macro conditions and lower cyclical political messaging demand, we believe Bandwidth will benefit from several growth drivers in 2024 including strong political messaging demand, increasing international traffic, a growing messaging business, improving gross margin, and an opportunity to grow with a large new cohort of customers.”
Getting to the brass tacks, he goes on to recommend the stock, saying, “We believe the shares are oversold at current levels given Bandwidth’s long-term business opportunity as a leader in CPaaS for large global enterprises and believe 2024 sets up with easier growth comps and the company is poised to deliver improving margins and cash flows.”
These comments add up to a Buy rating for the shares, in Walkley’s view, and his $36 price target implies a very strong one-year upside of 163%. (To watch Walkley’s track record, click here)
Overall, Wall Street rates this stock as a Moderate Buy, based on 7 recent analyst reviews that include 3 Buys to 4 Holds. The shares are trading for $13.67 and their $21.40 average target price suggests a gain of 56.5% in the next 12 months. (See BAND stock forecast)
Digi International (DGII)
Next up is Digi International, a company known for its innovations in the world of IoT networking. Digi focuses on the network technology that makes IoT possible. This is a rich field for an opportunistic tech firm – Digi points out that 23 billion IoT devices will transmit over 430 trillion bytes of data just in the time it takes to read a sentence like this one.
The company offers a wide range of products to make this technological miracle happen. This includes the embedded and external wire and wireless network communications support hardware, such as radio modems and LTE modules, as well as scalable USB devices that can be plugged in when needed and easily switched for later, better, faster versions. Customers can find cellular routers, networking devices, and single-on-board computers – if it’s needed in IoT or machine-to-machine communications, Digi works with it or can provide it.
Like Bandwidth above, Digi has shown both increasing earnings and revenues this year – and a stock price that has fallen by 28% year-to-date. Much of that loss came in the wake of the company’s fiscal third quarter report when its FQ4 outlook failed to please.
Eventually in fiscal 4Q23, Digi reported a top line of $112 million, beating the forecast by $880K and growing more than 6% y/y. The company’s bottom line, the non-GAAP adjusted EPS of 52 cents, was 4 cents better than had been anticipated.
5-star analyst Walkley is impressed by Digi’s potential going forward. He notes that supply-demand dynamics have impacted financial results, but sees reversion to normal on that horizon. He writes, “With management indicating a gradually easing supply chain that should normalize during F2024, we believe Digi is positioned for improving cash flow as inventory and overall working capital levels improve. Coming off several strong years of growth and margin expansion, management provided initial F2024 guidance of flattish revenue to F2023 levels due to the macro and some of its larger console server customers working through their own inventory for the next few quarters. This, combined with an increasing attach rate for solutions versus previous hardware-only sales, is impacting near-term revenue growth but enabling Digi to post stronger long-term margins.”
Walkley sums up his view of DGII with a simple recommendation: “With Digi’s improved IoT focus and execution to drive a simplified product offering with stronger revenue growth and adjusted EBITDA margins longer term, we believe the shares remain an attractive opportunity.”
Quantifying his stance, Walkley rates these shares as a Buy, and his $45 price target points toward a one-year upside potential of 72%.
Wall Street clearly agrees with this bullish view. The 6 recent reviews on DGII shares are unanimously positive, for a Strong Buy consensus rating. The analysts’ average price target of $37.80 implies an upside of 44.5% by the end of 2024. (See DGII stock forecast)
Everbridge (EVBG)
Every organization, everywhere, sends messages – and sometimes, it is critical that those messages get through. Everbridge, founded in 2002, has long been a leader in critical event management, empowering its enterprise customers to anticipate and see, respond to and mitigate, and recover from, critical events in their areas of work. This includes, but is not limited to, facilitating faster communications, bringing new users onboard more efficiently, and minimizing errors in networked communications.
The company offers a unified platform for digitizing organizational resilience, so that the right message reaches the right person at the right time. This can include everything from simple emails or digital messages to mass notifications at times of severe weather, power outages, or other disruptive events. This is an essential service, and Everbridge provides it for a distinguished customer list – names like Tiffany & Co, Nokia, Dow, CVS, Anthem, and Goldman Sachs all depend on Everbridge.
The key to Everbridge’s success has been its ability to provide reliable communications solutions on a simple, unified platform. SMS, email, desktop alerts, and voice messages – all of these are available through Everbridge’s services.
That said, EVBG stock is down 14% year-to-date, having also fallen victim to disappointing outlook syndrome following its Q2 report, despite delivering better-than-expected quarterly results.
In the most recent quarter, 3Q23, the company’s non-GAAP earnings came to 46 cents per diluted share. This was up from 27 cents per diluted share in the prior year quarter, and was 4 cents per share better than had been anticipated. At the top line, the company’s revenue came to $114.2 million, for a 2.5% y/y increase – and was more than a half-million dollars over the forecast.
Looking at Walkley’s comments, we find the analyst is bullish on the company, citing its quality product and its potential to reach its ambitious goals. “Everbridge continues to execute on its previously announced strategic changes to end various non-core products and shift GTM strategies,” Walkley explained. “Its simplified product suite and GTM motion should help Everbridge maintain its leadership position in CEM (critical event management) to help customers manage critical incident communications as it targets an ambitious long-term goal of $1B ARR driven by a goal to reach ~1K customers with over $250K + ARR.”
These comments lead Walkley to a simple, upbeat conclusion: “We believe the shares are oversold at current levels given Everbridge’s long-term business opportunity as the leader in the $20B+ CEM market.”
This top analyst puts a Buy rating on Everbridge, along with a $32 price target that suggests a gain of 31% on the one-year horizon. (To watch Walkley’s track record, click here)
While Walkley represents the bullish view on EVBG, the Street isn’t quite ready to go there. The stock has a Hold consensus rating, based on 10 reviews that split 3-4-3 between Buys, Holds, and Sells. The $23.67 target price suggests the stock will stay rangebound for the time being. (See EVBG stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
