I am bearish on RingCentral stock (NYSE:RNG) as some significant headwinds are weighing on this business and will continue to translate into a falling share price. Headwinds come mainly from central banks raising interest rates to slow down inflation and geopolitical tensions between countries.
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RingCentral is a Belmont, California-based software applications company specializing in software-as-a-service (SaaS) technology that businesses can deploy in areas such as contact centers and video communications.
Due to the above factors, RingCentral’s shares have plunged over 75% so far this year, significantly underperforming its benchmark, the Technology Select Sector SPDR Fund (XLK), which instead fell by 22%.
More Downside Risks Ahead for RNG Stock
RingCentral recently revised its “Risk Factors” section to now reflect a broader range of challenges the company may face in the future. Interestingly, according to TipRanks’ risk analysis, RingCentral’s disclosed risks grew from 55 in Q2 2021 to 60 in Q2 2022, with Finance & Corporate risks as the category with the most risks.
A snapshot of RingCentral’s balance sheet at the end of the most recent quarter suggests that the company does not have the greatest financial position. RNG had $267 million in cash and equivalents as of June 30, 2022, which was much less than its total borrowings hovering around $1.68 billion.
Debt is primarily represented by senior convertible notes, for which the company paid nearly $35 million in interest expenses for the 12 months ended June 30, 2022. This is on track to get worse due to the Federal Reserve’s monetary policy to combat record inflation through aggressive interest rate hikes.
By making access to the loan capital more difficult, rising borrowing costs can undermine growth projects and hurt the company’s sales and future profitability.
Instead, RingCentral’s current situation requires something different. The company would certainly need revenues that will continue to rise so that any currently unproductive investment project generates a positive return and exceeds its associated financing costs.
At this point, RingCentral is still unable to get to the heart of the matter, as its weighted average cost of capital is 8.02% compared to a return on invested capital of -21.30%.
The increase in revenue over time, which is key to changing the above relationship, is what shareholders would like to see, but the second quarter of 2022 hasn’t fully lived up to expectations.
RingCentral’s Revenue Growth Slowed Down in Q2 2022
While revenue of $487 million in the second quarter of 2022 rose by 28% year-over-year and topped the company’s guidance, the growth rate showed signs of slowing down compared to previous quarters, including pre-pandemic periods.
The pace of growth has gradually deteriorated over time, dropping more than 8% from the 36%-36.5% levels seen in the second and third quarters of 2021.
Some may argue that growth is normalizing following the boom in technologies that boosted online communication and business connections during COVID-19. However, this does not appear to be the case since the recent growth rate was lower than its pre-pandemic growth rate.
To name a few pre-pandemic trends, revenue grew 34.1% year-over-year to almost $253 million in the fourth quarter of 2019 and increased almost 33% year-over-year to $267.5 million in the first three-month period of 2020.
In addition, RNG suffered an operating loss of $1.68 per share in Q2 2022, down from a loss of $1.22 per share last year. On an adjusted basis, the bottom line was a net profit of $0.45 per diluted share, compared to the prior year’s quarter of $0.32 per diluted share. The adjusted net income was realized after deducting the impact from amortization charges related to the acquisition of intangibles totaling approximately $43.7 million and a notable loss on investments of nearly $49 million.
The latter indicates that RingCentral’s income is highly exposed to financial markets’ volatility, which is more difficult to manage due to the severity of the current headwind.
Looking ahead to 2022, the company said it expects total revenue to still be between $1.99 billion and $2.015 billion, reflecting another slowdown, as the annual growth rate would be 25% to 26%.
High inflation, a slowing economy, and the ongoing U.S.-China tariff war could have a major impact on sales of contact centers and video communications software, as demand for related technologies such as computers could come under pressure.
Is RNG Stock a Buy?
In the past three months, 18 Wall Street analysts have issued a 12-month price target for RNG. The stock has a Strong Buy consensus rating based on 14 Buys, four Holds, and zero Sells. The average RNG stock price target is $80.56, implying 88.3% upside potential.
Conclusion – Risks Weigh on RNG Stock’s Growth Prospects
There is a gradually decreasing trend in the annual growth rate of sales, which does not bode well with the company’s need to increase the return on invested capital. This trend is bound to intensify due to macroeconomic and geopolitical headwinds, while market volatility is affecting some earnings.
