Yahoo Finance Sell Zoom Video, Buy RingCentral?
Investors are excited about Zoom Video Communications (NASDAQ: ZM). The fast-growing provider of video-conferencing solutions has been one of this year's hottest IPOs, soaring 121% since going public at $36 last month.
The downside to being an overnight market darling is that the surge in popularity often props valuations to lofty levels, leaving investors to ponder other ways to play the same field. RingCentral (NYSE: RNG) is a potential proxy, offering some of the sizzle of Zoom with a more compelling valuation profile. As a bonus, the two companies are partners, as Zoom Video powers the video-conferencing features behind RingCentral's enterprise communications platform.
Image source: Zoom Video Communications.
Valuation is relative
RingCentral offers enterprise communications, collaboration, and contact center solutions. Its flagship product is a cloud-based system where companies pay as little as $19.99 a month per user to allow businesses to seamlessly route inbound calls to IP phones, smartphones, PCs, and tablets. RingCentral accounts can also engage in video conferencing, and that's where Zoom Video enters the picture. The two companies announced a multi-year extension to their existing partnership last week, allowing RingCentral customers to continue replacing their legacy systems with one that combined its cloud PBX with Zoom's video communications platform.
Investors don't typically view phone systems and video-conferencing as fields fertile for growth, but it's hard to overlook the heady growth at both companies. Revenue rose 34% to hit $201 million for RingCentral's first quarter, matching the 34% top-line surge it posted for all of 2018.
Zoom Video is growing a lot faster. Revenue soared 114% in fiscal 2019. It has yet to post a financial report as a public company -- it will announce fiscal first-quarter results next month -- but analysts see revenue growth slowing to 79% this year.
The top-line growth is clearly Zoom's strength over RingCentral, but let's talk valuation. RingCentral commands a market cap just north of $10 billion, and that's half of the more than $20 billion market valuation that Zoom is commanding.
Zoom Video doesn't run a larger business than RingCentral. Its trailing revenue of $330.5 million is less than half the $724.8 million RingCentral has delivered on the top line over the past four quarters. RingCentral isn't exactly cheap at an enterprise value that's less than 14 times trailing revenue, but that's a relative bargain when pitted against Zoom at its nosebleed multiple of 62.
Neither company is cheap on an earnings basis. RingCentral raised its guidance last week, now targeting adjusted earnings per share of $0.71 to $0.75 this year. Zoom Video is just starting to turn the corner, and analysts see a profit of $0.19 a share this fiscal year.
RingCentral isn't exactly an out-of-favor alternative for Zoom Video-sniffing value hounds. RingCentral hit another all-time high on Thursday, and the stock has soared 154% since the start of last year.
Both companies are doing a lot of things right these days, but Zoom's thin niche will pose more upside challenges given its $20.4 billion price tag. RingCentral isn't cheap, but at half market cap with a broader legacy market to conquer, it's the one better positioned to beat the market at this point.
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Rick Munarriz owns shares of RingCentral. The Motley Fool owns shares of Zoom Video Communications. The Motley Fool has a disclosure policy.
