RingCentral’s 38.9% return over the past six months has outpaced the S&P 500 by 31.3%, and its stock price has climbed to $40.01 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy RingCentral, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think RingCentral Will Underperform?
We’re happy investors have made money, but we’re swiping left on RingCentral for now. Here are three reasons we avoid RNG, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
RingCentral’s billings came in at $632.4 million in Q1, and over the last four quarters, its year-on-year growth averaged 5.2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
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 RingCentral’s revenue to rise by 4.5%, a slight deceleration versus its 15% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, RingCentral’s operating margin rose by 5.3 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 6.3%.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of RingCentral, we’re out. With its shares outperforming the market lately, the stock trades at 1.3× forward price-to-sales (or $40.01 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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