RingCentral: Looks Attractive Following the Stock’s Steep Decline

RingCentral (RNG) is a leading supplier of global enterprise cloud communications, video meetings, collaboration, and contact center software-as-a-service solutions.

The company believes that its innovative, cloud-based communication and contact center solutions revolutionize the growing business communications and collaboration market by providing flexible and cost-effective solutions that reinforce mobile and distributed workforces.

RingCentral has been consistently growing its top line for years now while getting closer and closer to posting sustainable profits. Over the past year, shares have been slipping lower following the stock’s expanded valuation around early 2021. Following the tech sector’s correction over the past couple of months, RingCentral’s stock has seen new lows by the day, currently trading over 60% lower from its 52-week highs of $449.

In my view, RingCentral is a well-run company that demonstrated its ability to grow consistently without burning tons of cash, similar to its industry peers. The ongoing share price decline has likely formed a buying opportunity, and for this reason, I am bullish on the stock.

Latest Results

RingCentral’s latest results once again demonstrated the company’s growth capabilities. Revenues grew 37% year-over-year to $415 million, with subscriptions revenue growing 38% year-over-year to $385 million.

Cash flow predictability should be further strengthened going forward, with total Annualized Exit Monthly Recurring Subscriptions also growing 39% versus the prior-year period to $1.64 billion.

To illustrate RingCentral’s revenue growth trajectory, the company has posted higher quarter-over-quarter revenues since its IPO (38 consecutive quarters).

The company has yet to report sustained GAAP profits due to still re-investing much of its operating cash flows back into the business (as well as rich stock-based compensation levels). Despite this, with robust gross margins and increasing economies of scale, RingCentral has solid profitability prospects. RingCentral’s gross margins stand at over 70%, substantially expanded from the low 60s a few years ago.

The company’s guidance points towards revenues in the range of $433.5 to $434.5 million in RingCentral’s upcoming earnings, representing year-over-year growth of 30%. Subscriptions revenues are also expected to land within the range of $404.5 to $405.5 million, suggesting annual growth of 32%. Hence, RingCentral’s growth has yet to show signs of a potential slow down.

The Valuation

RingCentral is currently trading at 8.4x its Fiscal Year 2022 sales, which implies a notable discount compared to its industry peers, despite rapidly expanding its subscription and total revenues.

The company is also expected to deliver non-GAAP EPS of around $1.66 next year, which implies a forward P/E of 106. While this may sound rich, with EPS likely to be expanding at a CAGR of 30%+ from there, the multiple is actually quite reasonable, in my opinion.

Wall Street’s Take

Turning to Wall Street, RingCentral has a Strong Buy consensus rating, based on 16 Buys and one Hold assigned in the past three months. At $310.44, the average RingCentral stock prediction suggests 75.8% upside potential.

Conclusion

In my view, RingCentral is a high-quality company whose stock has been beaten down more than it deserved. Sure, the stock had gotten quite expensive, but at its ongoing growth levels, I find the stock’s valuation metrics rather attractive, likely signaling a buying opportunity.

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