Buy RingCentral Stock Over Zoom, Goldman Says

Communications software is in a long-term growth cycle, but there are better ways to play the sector than Zoom Video Communications, according to Goldman Sachs analyst Kash Rangan.

On Thursday, Rangan picked up coverage of the “communications and collaboration” segment, launching coverage of seven stocks, including closely watched Zoom (ticker: ZM), which he starts with a Neutral rating.

Rangan is bullish on the opportunity overall. He finds that the addressable market in communications software is close to 30% of overall long-term enterprise software spending, in many cases replacing legacy hardware and services, and “continuing the general trend of software expansion into the broader economy.” Rangan concedes that cloud penetration in the communications sector so far is modest, but he sees growing acceptance, with industry growth of better than 30%.

On Zoom, Rangan writes that the company “remains poised to be one of the most strategic applications software companies” in the sector, but he notes that after a five-quarter period of hyper growth—with quarterly revenue expanding between 169% to 369% on a year-over-year basis—the company now faces challenging comparisons and much higher churn in small accounts. He thinks it will be a challenge for the company to sustain 25% growth longer term. Rangan sets a price target on the stock of $200.

Rangan set Buy ratings on both RingCentral (RNG), with a $240 price target, and Twilio (TWLO), with a $350 target, both potential returns of more than 30% from current levels. RingCentral, he writes, “offers investors high visibility into multi-year durable high revenue growth in a large market with a much improved competitive position and a complete multi-modal communications and collaborations platform whose value proposition has been elevated with Covid-19.” On Twilio, Rangan asserts that the provider of communications services to websites has “significant mind share with developers,” with management projecting growth above 30% in each of the next four years.

Rangan sets Neutral ratings on both LiveVox Holdings (LVOX), a contact-center software provider, and Atlassian (TEAM), a provider of software-development and project-management tools.

The analyst starts both Everbridge (EVBG) and Citrix Systems (CTXS) with Sell ratings. On Everbridge, which provides a mass notification service for companies and government agencies, he sees “near-term execution and disruption risk” after the recent resignation of the company’s CEO. Citrix, he writes, is going through a “complex cloud transition” that has pushed out some of its financial targets. He notes that the company is going through a management change and canceled an analyst day that had been scheduled for October.

Citrix rose 1.2%. Twilio fell 0.3%, LiveVox fell 3.2%, RingCentral fell 2.3%, Everbridge fell 4.5%, Zoom fell 0.7%, and Atlassian fell 5.2% on Thursday.