Shares of cloud communications software and services provider RingCentral, Inc. (RNG) are being hit hard amid an ongoing sell-off of tech stocks. After nearly doubling in value over the past year, the stock has declined 22.3% over the past month, and 9.2% year-to-date.

A faster-than-expected COVID-19 vaccination drive has been driving the stock markets, with the Dow Jones Industrial Average and S&P 500 closing yesterday’s trading session at record levels. Technology stocks have been on a downtrend, however, as evidenced by Technology Select Sector SPDR Fund’s (XLK) 4.2% decline over the past month.

While RNG’s top line has improved over the past year, the company has yet to generate stable cash flows. This concerning financial situation makes the company’s recovery potential from the ongoing tech sell-off uncertain.

Here’s what could drive RNG’s performance in the near term:

Impressive Growth History but Mixed Financials

RNG’s revenues have increased at a CAGR of 33% over the past three years, while its EPS has increased at a CAGR of 24.4% over the period. Its total assets and levered free cash flows have increased at CAGRs of 82.4% and 90.3%, respectively, over the past three years.

Also,  RNG’s revenues and EPS have increased 31.1% and 45.1% year-over-year, respectively. RNG has generated revenues of $1.18 billion over the past year. Its trailing-12-month gross profits was  $860.05 million, translating to a gross profit margin of 72.66%. However, the company has failed to generate profits over the past year. Its trailing-12-month net income and EPS stood at negative $83 million and $0.94, respectively. Its trailing-12-month operating income and EBITDA are in the red also. RNG’s RPE, ROA and ROTC margins are all negative too.

Furthermore,  the company is bleeding cash. Its trailing-12-month net operating cash flow is negative $35.19 million. RNG has a significant debt burden as well, as indicated by its  debt/free cash flow ratio of 7.56.

Premium Valuation

In terms of non-GAAP forward p/e, RNG is currently trading at 280.13x, 948.5% higher than the industry average  26.72x. The stock’s non-GAAP forward PEG ratio of 10.27 is 420.8% higher than the industry average  1.97.

RNG’s forward price/sales and price/cash flow multiples of 20.95 and 119.06, respectively, are significantly higher than their respective industry averages.

Consensus Ratings and Price Target Indicates Potential Upside

RNG has an average broker rating of1.31, indicating favorable analyst sentiment. Of 24 Wall Street analysts that rated the stock, nine rated it Strong Buy, and 15 rated it Buy.

Analysts expect the stock to hit $400.13 soon, indicating a potential upside of 7.9%.

POWR Ratings Depict Uncertainty

RNG has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

It has a grade of C for Momentum, Quality, and Sentiment. These grades are justified given the company’s declining share prices and weak profitability. Also, RNG is currently trading above its 200-day moving average of $329.68, but below the 50-day moving average of $383.79, indicating a sideway drift.

RNG is currently ranked #46 of 61 stocks in the C-rated Software – Business industry. In addition to the grades I’ve highlighted, you can check out RNG’s ratings for Value, Sentiment and Growth here.

There are 20 other stocks in the Software – Business industry with an overall rating of A or B. Click here to view them.

Bottom Line

RNG’s improved financials and rising market share can be attributed to pandemic tailwinds. However, with a gradual economic recovery and Biden’s policy measures, including direct recovery  checks and a plan to administer 100 million vaccinations over 60 days, have  caused the tech stock rally to slow down. As support checks start hitting people’s  bank accounts,  tech stocks could pull back further. With RNG’s weak balance sheet and fundamentals, we think it is better to wait for the tech sell-off to subside.

Click here to check out our Software Industry Report for 2021

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RNG shares were trading at $328.34 per share on Tuesday afternoon, down $15.92 (-4.62%). Year-to-date, RNG has declined -13.36%, versus a 6.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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