How Big of a Telecom Disruptor Is RingCentral Really?

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RingCentral Inc. (NYSE: RNG) is one of those companies that could see exponential growth in the years ahead as companies look to lower their communications costs. The virtual enterprise telecom service provider received a very well-known portfolio manager recommendation on Tuesday and the company received a big analyst initiation on Wednesday.

On a CNBC interview from Tuesday, portfolio manager Dan Niles (a former Wall Street analyst) noted that RingCentral was grossly undervalued now that its shares had sold off. Niles hinted that it could even be a double due to its disruptive force in enterprise telecom. As proof, Niles showed that RingCentral had only 1% in market penetration in a potential market of $75 billion.

In a follow-up call on Wednesday, Oppenheimer initiated coverage of RingCentral with an Outperform rating. The brokerage firm also assigned a $20 price target. The consensus price target from analysts in general is $21.25, according to Thomson Reuters.

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Oppenheimer gave several key points for why RingCentral is a buy now. The firm said that its product demand is positioned for strong growth with secular trends. Oppenheimer also thinks that channel expansion with strategic carriers could boost RingCentral’s market share gains and larger customer traction — with strategic partnerships with AT&T, TELUS and BT. Another boost is that the PBX hosting leader should morph into a platform provider, and lastly this recent share price area was considered a very reasonable entry point for investors.

Brian Schwartz, the analyst behind the call at Oppenheimer, said:

We believe RingCentral holds a special position in the fast-growing PBX hosting subsegment of business communications. Our diligence sessions with customers and industry analysts indicate RingCentral also has one of the top business communications infrastructure cloud platforms and technology vision for small to medium-sized businesses. This leadership positioning has fueled dramatic core product growth (58% in Q2) and annual recurring revenue growth (39% in 2Q). We expect RingCentral’s product demand to sustain strong growth because secular trends are increasingly pushing businesses of all sizes toward SaaS communication infrastructure providers, like RingCentral, that are nimble with their product-enhancements, integrations and yield a quick return-on-investment.

RingCentral has only been public since late 2013, and its post-IPO range is $11.33 to $23.65. One note of caution: analysts are expecting losses of $0.52 per share in 2014 and $0.23 per share in 2014. That is after expected revenue growth of 34% to $215 million in 2014 and another 25% growth to $269 million for 2015.

RingCentral shares were down 2.5% at $14.30 in Wednesday afternoon trading, but this is still far above where the stock was before Dan Niles touted the stock on CNBC on Tuesday. The stock rallied on that tout from $13.75 to as high as $15 before coming back to normal trading again.

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