RingCentral has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 23% and now trades at $37.18. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in RingCentral, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think RingCentral Will Underperform?
Despite the momentum, we don't have much confidence in RingCentral. Here are three reasons why RNG doesn't excite us and a 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 $651.1 million in Q4, and over the last four quarters, its year-on-year growth averaged 3.8%. 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 16.3% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
RingCentral’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between RingCentral’s products and its peers.
Final Judgment
RingCentral doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 1.3× forward price-to-sales (or $37.18 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.
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