RingCentral, Inc. (RNG) in San Mateo, Calif., is a prominent provider of cloud communications and contact center solutions for businesses, based on its powerful Message Video Phone (MVP) worldwide platform. RNG received a coveted 5-star rating from CRN, a brand of The Channel Company, in its 2022 Partner Program Guide for the seventh consecutive year.

However, the company’s shares are down 72.7% in price over the past year and 65.7% year-to-date to close yesterday’s trading session at $64.20.

Despite posting better-than-expected earnings results and beating analysts’ estimates for both earnings and revenue, RNG’s shares are down 39.8% over the past months as several analysts lowered their rating for the stock. The stock was downgraded by equities research analysts at Robert W. Baird to “neutral” from “outperform.” And Pipe Sandler lowered its price objective on the stock to $118.00 from $228.00.

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

Mixed Financials

RNG’s total revenue increased 32.7% year-over-year to $467.66 million for the first quarter, ended March 31, 2022. Its net cash from operating activities grew 59.6% for the three months ended to $58.99 million. Its ARR (Annualized Exit Monthly Recurring Subscriptions) grew 35% year-over-year to $1.9 billion.

However, its total operating expenses increased 39.8% from its year-ago value to $415.72 million. Its operating loss rose 146.5% from the prior-year quarter to $103.54 million. And the company’s net loss surged significantly from its year-ago value to $150.97 million. Its loss per share amounted to $1.60 over this period.

Mixed Profitability

RNG’s $174.19 million trailing-12-months cash from operations is 104.2% higher than the $85.32 million industry average. Its 70.4% trailing-12-months gross profit margin is 39.6% higher than the 50.4% industry average. However, its trailing-12-months ROA, net income margin and ROE are negative 20.5%, 30.8%, and 402.6%, respectively, compared to their industry averages. Also, its 4.85% trailing-12-months levered FCF margin is 47% lower than the 9.14% industry average.

Premium Valuation

In terms of forward Non-GAAP P/E, the stock is currently trading at 34.70x, which is 84.5% higher than the 18.81x industry average. Also, its 3.73x forward EV/Sales is 34.9% higher than the 2.76x industry average. Furthermore, RNG’s 18.12x forward Price/Book is 366% higher than the 3.89x industry average.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. RNG has a C for Quality and Growth. The company’s mixed profitability and Financials are consistent with these grades.

Among the 57 stocks in the D-rated Software – Business industry, RNG is ranked #34.

Beyond what I have stated above, one can view RNG ratings for Stability, Momentum, Value, and Sentiment here.

Click here to check out our Software Industry Report for 2022

Bottom Line

While the company’s recent strategic collaboration and launch of new products and capabilities position it to experience solid growth in the coming months, recent analyst downgrades on the stock are concerning. In addition, the stock is currently trading below its 50-day and 200-day moving averages of $100.76 and $182.03, respectively, indicating bearish sentiment. Moreover, given its premium valuation, we believe investors should wait before scooping up its shares.

How Does RingCentral Inc. (RNG) Stack Up Against its Peers?

While RNG has an overall C rating, one might want to consider its industry peers, VMware Inc. (VMW), Sapiens International Corporation N.V. (SPNS), and Software AG (STWRY), which have an overall A (Strong Buy) rating.

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