RingCentral (NYSE: RNG) provides software-as-a-service solutions that enable businesses to communicate, collaborate, and connect in North America.
The company’s products include RingCentral Professional, RingCentral Office, RingCentral Glip, and RingCentral Fax. The company was founded in 1999 and is headquartered in Belmont, California.
I am bearish on RNG stock. The company has robust revenue growth, but it is a money-losing business with a lot of debt. RNG stock has underperformedthe Dow Jones and S&P 500 in 2021, which is fully justified by the company’s financial performance.
RingCentral Business News
RingCentral and Mitel recently “announced a strategic partnership to provide Mitel’s global customer base with a seamless migration path to RingCentral’s Message Video Phone™ (MVP®) cloud communications platform.”
RingCentral has also announced a partnership with Alcatel-Lucent Enterprise “to offer a unified comms (UC) solution that will be delivered via channel partners.”
Other notable business news includes RingCentral being included in a list of 50 companies with the happiest employees, entering the Mexican market via a partnership with local provider MCM Telecom, a $100-million share repurchase authorization, and an executive leadership change.
RingCentral recently announced that Anand Eswaran would leave his position as president and COO. Vaibhav Agarwal, the Company’s Chief Accounting Officer, was appointed as the Interim CFO, effective January 1, 2022.
Q3 2021 Earnings
RingCentral’s earnings report for Q3 2021 was a mixed.
Total revenue increased 37% year-over-year to $415 million, subscriptions revenue increased 38% year-over-year to $385 million, total ARR of $1.6 billion was up 39%, and mid-market and enterprise ARR reached approximately $1 billion, up 53%.
Normalized EPS was $0.36, beating expectations by $0.03. Revenue of $414.63 million was better than the estimate by $21.18 million.
The GAAP EPS told another story, coming in at -$1.60 (a miss by -$0.64).
Fundamental Risks
Net losses have been widening over time, despite solid revenue growth. Negative operating income, a dilution of shares, and large amounts of debt are also reasons to be cautious with RingCentral.
From 2016 until 2019, RingCentral was generating positive free cash flow. In 2020 it reported a figure of free cash flow of ($101.56 million) a growth of -395.38% compared to 2019.
In Q3 2021, the firm reported cash of $345.15 million on its balance sheet and long-term debt of $1.42 billion. The ratio of cash to long-term debt is about 24.29%. On top of that, the debt-to-equity ratio of 4.58 for 2020 was the highest level of the past five years.
The firm has high gross margins above 70%, but at the same time negative net and operating margins. The profitability margins have worsened over the past two consecutive years.
RingCentral raised its total revenue range from $1.580 billion to $1.581 billion, representing annual growth of 33% to 34% for FY 2021.
Valuation
Data from Simply Wall Street shows that RNG stock is overvalued based on its P/B Ratio (396.1x) compared to the U.S. Software industry average (5.8x).
Wall Street’s Take
Turning to Wall Street, RingCentral has a Strong Buy consensus based on 17 Buys and one Hold rating. The average RingCentral price target of $325.65 represents 68.6% upside potential.
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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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