RingCentral Needs More 'Marquee Wins' To Justify Valuation

Analysts at Morgan Stanley no longer hold a bullish stance on RingCentral Inc RNG, a software-as-a-service solutions provider for businesses to support modern communications, largely due to valuation concerns.

After a nearly 70 percent return since the start of 2017, Morgan Stanley's Meta Marshall downgraded RingCentral's stock from Overweight to Equal-weight with a price target boosted from $33 to $37.

RingCentral's stock is now trading at approximately a 5x multiple on EV/2016e Subscription Revenue, which marks an uptick from a prior 4.0x multiple, the analyst stated. While the company can continue generating 25 percent growth with little operating leverage, the analyst would also need to see a more "marquee" enterprise accounts added to its customer base to justify an ongoing Overweight rating.

Alternatively, an Overweight rating may also be justified if the company continues to demonstrate 25 percent-plus growth with operating leverage as doing so would "highlight a much faster transition to enterprise."

Also playing a factor in the analyst's revised rating is the fact that the small and medium business (SMB) segment still accounts for more than two thirds of total revenue, Marshall noted. This is notable because the segment is plagued with higher churn characteristics, which prevents the stock from carrying a more premium valuation.

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