By James Rogers
Cloud-based communication company RingCentral is a 'cash incinerator' at risk of declining to $0 per share, according equity research firm
Cloud-based communication company RingCentral has been added to the list of "zombie" stocks compiled by equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, describes RingCentral Inc. (RNG) as a "cash incinerator" at risk of declining to $0 per share.
"RingCentral's stock was trading at $443 per share in February 2021 and while the stock is down some 90% since then, we believe shares have much more room to fall," wrote New Constructs CEO David Trainer, in a note. "We recommend investors avoid this zombie stock."
RingCentral's stock has fallen 80.9% in 2022, outpacing the S&P 500 index's decline of 24.3%.
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Since 2017, RingCentral has burned through $2.5 billion in Free Cash Flow excluding acquisitions, according to New Constructs.
Citing RingCentral's latest 10-Q filing, New Constructs notes that the company had $306.5 million in cash and cash equivalents and $113.2 million in long-term investments at the end of June. "Even with $420 million in cash on the books as of June 30, 2022, RingCentral's cash balance can only sustain its TTM cash burn rate for another 2 months from the end of September," wrote Trainer. "In other words, a capital raise or significant change in business operations is needed to remain a going concern."
The company also relies on third parties to help sell its services, such as hardware resellers or phone service providers that bundle RingCentral's service, according to New Constructs. However, many of these firms are also direct competitors and offer services that could be used in lieu of RingCentral, the equity firm warns.
In its most recent 10-K filing, RingCentral acknowledged that some of the company's carriers and strategic partners, such as AT&T Inc. (T), TELUS Corp. (T.T), Verizon Communications Inc. (VZ), and Avaya Holdings Corp. (AVYA), sell or are expected to sell its solutions, but are also competitors for business communications.
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RingCentral joins Freshpet Inc. (FRPT), Peloton Interactive Inc. (PTON), Carvana Co. (CVNA), Snap Inc. (SNAP), Beyond Meat, Inc. (BYND), Rivian Automotive Inc. (RIVN), DoorDash Inc. (DASH), Shake Shack Inc. (SHAK), Chewy Inc. (CHWY), Uber Technologies Inc. (UBER), Robinhood Markets Inc. (HOOD), Tilray Brands Inc. (TLRY), Affirm Holdings Inc. (AFRM), SunRun Inc. (RUN), Blue Apron Holdings Inc. (APRN), and meme stocks AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) on New Constructs' "zombie" stocks list.
"Companies with heavy cash burn and little cash on hand are risky investments in any market, but especially now as high inflation, rising rates, and a slowing economy make raising capital increasingly expensive or impossible," Trainer added.
A number of analyst firms cut their stock price targets for RingCentral after the company reported its fiscal second-quarter results in August. Truist Securities lowered its RingCentral price target to $80 from $120, citing a "cautionary macro backdrop," assumptions of incremental F/X headwinds and significant valuation retrenchment. However, the analyst firm maintained its buy rating for RingCentral.
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KeyBanc Capital Markets has an overweight rating for RingCentral. In a note released last month the analyst firm resumed coverage of a number of infrastructure companies focused on digital automation, including RingCentral. The company's shares, it said, are trading at a discount to its peers by growth cohort, more than factoring in competition from the Microsoft and Zoom, as well as RingCentral's SMB exposure. KeyBank Capital Markets has a $59 price target for RingCentral.
Of 30 analysts surveyed by FactSet, 25 have an overweight or buy rating and five have a hold rating for RingCentral.
(END) Dow Jones Newswires
October 10, 2022 14:59 ET (18:59 GMT)
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