As many of you have Direct messaged me asking about which companies in my portfolio are undervalued.
I am going to take it a step further and will highlight at least one stock a month from my portfolio which could be multi-bagger and undervalued during that time period.
I may not be able to consistently send out every month but I will try my best.
My writing should act as a springboard for you to do your due diligence and learn how I see value in a growth company. These write ups or cliff notes versions will not be recommendations or any investment advice. I am also going to take a different route to the write up. I believe we should break away from writing 10 pages of investment thesis given each one of us have very busy lifestyles and other priorities in life. My write up will be very short and succinct.
Without further ado.
The company I am highlighting today is RingCentral.
Investment thesis for RingCentral (RNG)
Background
Provides Unified Communications-as-a-Service platform
Leading provider of enterprise cloud communications, video meetings, collaboration, and contact center software as a service.
Disruptor of private branch exchange (PBX) basically switchboard operation
There are total of 450 million seat opportunity
Only 10-12 million currently use UCaaS for communication
RNG has penetrated 2.5 to 3 million
RNG provides cloud-based communication and contact center solutions by providing flexible and cost-effective solutions that support mobile and distributed workforces.
Competitors/Risk: $MSFT $ZM
Economic moat: switching costs
Macro view on the company
Strategy: Channel partners like Avaya and AT and T.
Avaya, AT and T, Verizon business and other partners provide access to 150 to 200 million of the on-premises users
Aim to displace landline phones.
Long term growth opportunities.
Similar offerings are provided by $ZM after acquisition of FIVN and MSFT.
But space for multiple winners given huge TAM.
Secular tail wind in the UCaaS
Business metrics and valuation:
Revenue growth rate 30% YOY
Gross margin 72.7%
2021 Revenue 1.5 B
90% subscription revenue
Every quarter the company came public beat and raise if I recall correctly what the CEO said.
Gross margin should expand as they increase their penetration of a total 450 million seat opportunity.
Current market cap of 22.7 billion
A SAAS company with a long runway of growth with switching cost as a moat should be fairly trading around at least 20 times revenue. That should give us a market cap of 30 billion dollars which is around 50% upside from today’s valuation
Depressed valuation may be related to perceived competition from $ZM and $MSFT.
If the company continues to execute as it has been, the stock might re-rate itself.
Disclosure: Long $RNG. First bought on 11/18/2019; doubled up on 05/24/2021. I can change or eliminate this position anytime without advance notice.
RNG price on 8/6/2021 at open 250.
Based on the numbers you have presented, it's insufficient to conclude that it's undervalued. Revenue multiple vs Growth rate suggests a different story.