1 SaaS Firm Set To Surprise in 2024

With the S&P 500 up 24.7% in 2023, RingCentral’s (NYSE:RNG) performance paled in comparison, posting a loss of 1.8% for the year.

And yet, among founder led companies, RingCentral stands out in so many ways that may surprise the ordinary investor who thinks of it simply as a cloud communications provider.

RingCentral Is No Ordinary SaaS Firm

When you’re trying to sell a software service to other firms, a big hurdle to overcome is the friction of connecting it with existing systems. That’s where RingCentral arguably shines brightest because its platform integrates seamlessly with other applications and services, such as Salesforce, Microsoft 365, and Google Workspace.

By creating a solution that unifies communication tools within a single software ecosystem, the company makes it easy for customers to integrate seamlessly with their existing tech stacks.

But customers are just one side of the equation and partners on another. RingCentral has developed relationships with a host of industry leaders from Avaya to Atos, bringing its state-of-the-art cloud communications solutions to Avaya’s extensive customer base.

These partnerships are key to fostering growth and driving predictable revenues over the medium to-longer term. They also cement RingCentral’s role as a leader in cloud communications around the world.

What’s not spotlighted as much is the company’s keen focus on artificial intelligence and machine learning. While many firms cite AI as a buzz word, RingCentral relies on it as a core part of its strategy to enhance product offerings with features like AI-driven call analytics, automated customer service tools, and intelligent call routing.

For customers, the end result includes deeper insights into communication patterns, improved efficiency and better customer segmentation, all of which combine to provide a competitive edge.

The net result has not only been success in North America but also expansion to Europe and Asia too, both of which offer enormous growth opportunities. The added benefit of international success has been revenue diversification, an attractive attribute institutional investors often want to see.

It’s not just geographical diversification that RingCentral enjoys but its wide variety of clients too from small startups to multinational corporations. This insulates the firm to a better extent from business sector risks. Small businesses in particular may struggle during economic slowdowns but at those times RNG has a steady stream of reliable revenues from larger corporations.

So, what does it all boil down to when it comes to the firm’s financial prospects?

Is RingCentral Stock Undervalued?

RingCentral is 9.5% undervalued according to the consensus estimate of 22 analysts who have a price target of $40.81 per share.

A discounted cash flow forecast analysis is much more optimistic with an upside to fair value of 39.4% and an intrinsic net worth of $47.33 per share.

Analysts appears to be increasingly upbeat about the company’s prospects with ten analysts revising their estimates higher for the next quarter.

Adding to the tailwinds, management has been active in repurchasing $240 million worth of shares, suggesting strong conviction in the prospects of the firm.

Clearly, the firm’s approach has been a hit. Unlike the many competitors who offer a one-size-fits-all solution, RingCentral stands out with flexibility and customized solutions tailored to the needs of its various customers.

The big question is whether the company has plucked all the low hanging fruit given that revenues have been decelerating from a string of 30%+ YoY quarterly growth rates in 2020 and 2021 to under 10% for the first time in three years last quarter.

While the top line growth rates have been declining, one key financial metric that has remained steady is the gross profit margin that has held firm at around the 70% level.

It’s also unlikely that revenues will be materially impacted given the increased adoption of remote work and the need for efficient communication tools too.

If there’s one major drawback to the financials, it’s evident on the balance sheet where the firm has $432 million in cash but a whopping $1.7 billion in long-term debt. That is not a comforting amount given how the rate environment has changed to hurt indebted enterprises.

Of further concern is the lack of profitability and the negative price-to-earnings ratio, meaning income seekers won’t be considering the firm anytime soon for a potential dividend payment.

Is RingCentral Stock a Buy?

RingCentral is generating about $2.1 billion in revenue yet valued at “just” $3.1 billion. That low price-to-sales ratio suggests the company is on sale and evidence of that is confirmed in a cash flows analysis as well as by analysts’ ratings.

So too has management been aggressive in buying back shares, thereby showing conviction in the upside opportunity for the stock.

But there are enough red flags to cause prospective investors concern. For one, the profitability is not evident and key metrics are in the red too, like price-to-book ratio and return on assets.

The tradeoff with RingCentral is one of growth versus profitability. For many years, quarterly growth YoY climbed above 30% but in recent quarters it has slowed significantly and has now fallen under 10%.

As the growth slowed, investors were unrelenting in punishing the stock, which underperformed the market by over 25% in 2023.

So, even though analysts have revised estimates higher and cash flows suggest fair value is much higher too, the reality is a resumption of high revenue growth year-over-year is likely going to be needed to excite institutional capital interest again, a key force needed to drive the share price higher.

Until that top line growth re-appears, the focus will remain on the bottom line, or lack of profits therein. Certainly, RingCentral is a compelling play but perhaps just not until the top line has re-ignited.

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