Summary
- RingCentral has enjoyed greater than 28% revenue growth in every year since its IPO.
- RNG is well positioned to continue to win the lion’s share of this UCaaS migration.
- We expect gross margin to continue to improve from its already strong 80%.
- On our longer-term analysis, we calculate the potential for a compounded annual return of 35-40% per year through the end of the decade.
The following segment was excerpted from this fund letter .
RingCentral Inc ( RNG )
RingCentral is a software-as-a-service ( SAAS ) provider of communications solutions to large enterprises. The company's solutions replace legacy office phone systems or Private Branch Exchanges (PBX) with a cloud-based virtual solution that enables a customer's employees to communicate via voice, text, video/web conferencing, and fax over multiple devices including cell phones, tablets, and computers from any location.
This cloud-based phone systems market, typically referred to as Unified-Communication-as-a-Service (UCaaS) is a roughly $10 billion market today and is projected to grow to over $100 billion over the next ten years as companies move their communications systems to the cloud.
The move to UCaaS adoption is being driven by both the obsolescence of PBX hardware underlying current office phone systems, and, like cloud adoption across the software stack, cloud-based phone systems being less expensive, more feature rich, and accessible anywhere. RingCentral (which went public in 2013) is the leading vendor to the UCaaS market and has enjoyed greater than 28% revenue growth in every year since its IPO, a growth rate that continued in the company’s recently reported 1Q22 in which it grew revenue 33%.
We believe the company can continue to grow revenue north of 25% for many years to come, driven by the global conversion of more than 400 million on-premises phone systems to the cloud.
RingCentral is well positioned to continue to win the lion’s share of this UCaaS migration, as the company has partnered with many of the largest legacy PBX vendors (including Avaya, Atos, AlcatelLucent, and Mitel) to be their recommended cloud solution for customers whose maintenance period on their installed systems ends (and the vendors no longer support them). RNG has also partnered with communications giants like Vodafone, AT&T and Verizon to sell co-branded cloud solutions into their customer bases.
As the company’s revenue scales, we expect gross margin to continue to improve from its already strong 80%, while we expect the company to continue to expand its EBITDA margin from 18% in 2022, toward typical SaaS margins of 40% or higher over the next several years.
At its current stock price, RNG trades at about 5x our expected 2027 EPS and 2x our 2030 EPS.
We project that the company will generate over 60% of its current enterprise value in excess free cash over the next 5 years and 150% of its current enterprise value in excess cash by the end of the decade. Using a historical market multiple of 18x 2027 EPS of $11.85 generates a target in 2026 (4 years hence) of $213, or nearly 4x today’s price. We believe these estimates to be conservative and we believe an 18x multiple is low for a business that is expected to be still being growing free cash flow at a healthy clip.
On our longer-term analysis (using 2030 EPS targets and/or one based on excess free cash flow generation), we calculate the potential for a compounded annual return of 35-40% per year through the end of the decade.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
RiverPark Funds - RingCentral: 35-40% Per Year Compounded Annual Return Long Term