What a time it’s been for RingCentral. In the past six months alone, the company’s stock price has increased by a massive 112%, reaching $78.18 per share. 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 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 $695 million in Q2, and over the last four quarters, its year-on-year growth averaged 6.5%. 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%, close to its 13.5% annualized growth for the past five years. This projection doesn’t excite us and indicates its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales 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.
Looking at the trend in its profitability, RingCentral’s operating margin rose by 4 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 6.7%.
Final Judgment
RingCentral falls short of our quality standards. After the recent surge, the stock trades at 2.5× forward price-to-sales (or $78.18 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.
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