Needham cuts RingCentral stock target to $36, keeps Buy rating

On Friday, Needham analysts adjusted their financial outlook on RingCentral (NYSE:RNG), reducing the price target to $36 from the previous $42, while maintaining a Buy rating on the company’s shares. The revision arrives after RingCentral reported its fourth-quarter earnings for 2024, which aligned with expectations, but provided guidance for the first quarter and full year of 2025 that fell short of the consensus. According to InvestingPro data, analyst targets for RNG currently range from $30 to $55, with the stock trading near $31, suggesting potential upside despite recent headwinds.

The company’s non-GAAP operating margin for the fourth quarter was reported at 21.3%, a year-over-year increase of 80 basis points. A notable achievement for the quarter was a record in free cash flow, which InvestingPro analysis indicates yields an attractive 16%. The annual recurring revenue (ARR) for RingCentral stood at $2.49 billion, marking a 6.9% year-over-year increase, which indicates a slowdown in growth for its core Unified Communications as a Service (UCaaS) product due to a decelerating total addressable market (TAM). The company maintains strong fundamentals with a gross profit margin of 71% and total revenue of $2.4 billion.

Despite the slower growth, management expressed confidence in RingCentral’s ability to pay off its debt expiring in March 2025 and is now focusing on the remaining notes due in 2026. The management team also reported progress in developing a trio of new products, which they expect will collectively reach $100 million in ARR by the end of calendar year 2025.

The analyst from Needham noted that while the softer outlook is a cause for concern, they believe that RingCentral is effectively managing its strategy and investing in new products that have the potential to reinvigorate growth. Consequently, while the price target has been lowered, the analyst’s optimistic Buy rating remains unchanged, reflecting a positive stance on the company’s future despite the revised estimates for fiscal year 2025.

In other recent news, RingCentral reported fourth-quarter earnings and revenue that surpassed analyst estimates, with adjusted earnings per share of $0.98 and revenue rising 8% year-over-year to $615 million. Despite these positive results, the company’s guidance for the first quarter was less optimistic, forecasting adjusted EPS of $0.93-$0.97 and revenue of $607-612 million, both below analyst expectations. For fiscal year 2025, RingCentral anticipates subscription revenue growth of 5-7% and total revenue growth of 4-6%.

In response to these developments, Mizuho (NYSE:MFG) Securities, Evercore ISI, and Goldman Sachs all adjusted their price targets for RingCentral, with Mizuho reducing it to $32, Evercore ISI to $35, and Goldman Sachs to $36, while maintaining neutral or in-line ratings. Analysts have noted challenges for RingCentral in the competitive Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) markets, despite its efforts to expand into AI and new product offerings. The company’s shift away from reselling NICE products is expected to impact its average revenue per user and annual recurring revenue.

Nonetheless, RingCentral is making strides in profitability, achieving GAAP operating profitability for the first time in 2024 and projecting strong free cash flow for 2025. The company is also progressing with its AI-first strategy, with new products like RingCX contributing significantly to its annual recurring revenue. RingCentral’s recent promotion of Kira Makagon to President and Chief Operating Officer marks another strategic move as the company navigates these challenges.

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