- RingCentral (RNG) stock should have upside potential this year.
- RingCentral’s business fits perfectly with ongoing trends.
- The snap-back rally will be hard, but it should be substantial.
RingCentral (NYSE:RNG) stock was one of the names caught amid the turmoil on Wall Street this week. It closed down 1.6% — the third red day straight. (RNG stock was down 8% from Monday’s close). Fortunately, the long-term thesis is a bit brighter than what the short-term pain might imply.
There are outside factors swaying investor sentiment away from high growth companies with net losses. The sources of worry are serious, so the edginess is understandable. However, smart money needs to look past the short-term headwinds, to capture strong opportunities to profit. Today, I’ll make a bullish argument for RingCentral stock.
The bears have been winning the recent battles in RNG stock for for the past 14 months. RingCentral peaked at the beginning of last year and it has been straight downhill since. From the high to the lows, it lost three quarters of its value. This is counterintuitive since it’s in the business of virtual communication. A concept that fits very well in the ongoing digital revolution.
The 2020 lock downs created a panic among businesses to get remote functionality. They needed remote connections on a large scale. When the world reopened for business, everyone was working from home. Telecommuting suddenly became a necessity, not just a novelty concept. Therefore, it’s not surprising to see RingCentral’s business benefit from the trend.
RNG Stock Is Not Reflective of Results
The company has been consistently delivering more than 30% revenue growth per year. While management deserves plenty of credit for this feat, one area it could improve upon is the net income, but for now it’s okay to carry a loss. Delivering strong growth doesn’t usually come cheaply. This is especially true as long as the company can maintain the $170 million of positive cash from operations. In an aggressive rate hike cycle, it’s important for companies to have financial freedom rather than relying on loans to operate.
Moreover, RNG stock carries a price-to-sales ratio of 6.8x, which is cheaper than Apple (NASDAQ:AAPL). It is fair to say that there’s no obvious bloat, and investors have realistic expectations from these levels. This makes them less likely to panic much further.
The entrepreneurial spirit has never been stronger. The services that RingCentral provides allow startups to instantly exist without large upfront costs. I’ve used their services eons ago, and they were a lifesaver back then. Although I don’t need them now, the low cost, plug-and-play aspect is unbeatable. In the old days, new businesses needed thousands to invest in a PBX system.
Looking out into the future, demand for RingCentral’s services should remain strong. It has carried the growth trend for enough years to earn the benefit of doubt. There is no reason RNG cannot continue doing so going forward. The trends that started in 2020 are lasting, as more of us will permanently telecommute.
There Are Better Days Ahead for RingCentral
So far, RingCentral stock does not reflect the positive points I’ve have cited. Eventually this will change and there’s a bit of evidence that the change is starting. The collapse brought the stock into pivotal zones that have been in place since 2018. Investors can make the assumption that the bounce off of $99 per share will hold this time. The next step for RNG stock bulls is to at least chop around sideways to establish a consolidation zone. Then they can use that as a platform from which they can mount a recovery rally.
The journey back won’t be easy and there will be sellers lurking at every milestone. Breaking through the $130 hurdle would be a great start. Then they can set their sights on tougher lines at $144 and $155. The rally won’t be easy, but it should be significant. It may require patience before results manifest, so active traders need to remain tactical. On the other hand, longer-term investors can simply take partial positions now and evaluate whether to add more later.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.