Zoom Video Communications (ZM 0.05%) and RingCentral (RNG -0.79%) both disrupted traditional phone calls with cloud-based communication services. Zoom, which was founded in 2011, initially simplified online video calls before rolling out voice-only calls and other collaboration features. RingCentral, which was founded in 1999, created a cloud-based private branch exchange (PBX) business telephone system called RingCentral Office. It subsequently expanded that ecosystem with virtual fax services, collaboration tools, and videoconferencing tools licensed from Zoom.
Investors flocked to both stocks during the buying frenzy in growth stocks in 2020 and 2021. Zoom's stock closed at an all-time high of $568.34 in October 2020, but it now trades at roughly $80. Likewise, RingCentral's stock reached its all-time high of $443.29 last February, but it's now worth about $33 a share. Both stocks fizzled out as rising interest rates drove investors away from higher-growth tech stocks. But is either beaten-down cloud communications stock still worth buying today?
Image source: Zoom.
What happened to Zoom?
Zoom's revenue soared 326% to $2.7 billion in fiscal 2021, which ended in January of the calendar year, as more people worked from home, attended online classes, and stayed in touch through screens throughout the pandemic. Zoom's catchy brand and streamlined interface enabled it to disrupt older videoconference platforms like Microsoft's Skype and Cisco's Webex. Its meteoric growth prompted many other tech companies to launch similar services.
But in fiscal 2022, Zoom's revenue only rose 55% to $4.1 billion as the lockdown measures ended. In fiscal 2023, it expects its revenue to increase a mere 7% to about $4.4 billion, which indicates its high-growth days are over.
Last year, Zoom attempted to buy Five9, a provider of cloud-based contact center software, to expand its ecosystem and boost its sales as its core business cooled off. But Five9's investors rejected Zoom's offer and the deal was terminated last September.
Zoom is still profitable by both generally accepted accounting principles (GAAP) and non-GAAP (adjusted) measures. After surging a whopping 854% in fiscal 2021, Zoom's non-GAAP earnings per share (EPS) increased another 52% in fiscal 2022. But in fiscal 2023, it's bracing for a 27% to 28% decline as it ramps up its spending on new features.
Zoom believes that some of those new features -- like Zoom Phone (for audio calls and text messages), Zoom IQ (for managing sales teams), and Zoom's Contact Center (for intra-office and customer service communications) -- will stabilize its long-term growth. However, that expansion could also fragment its ecosystem, dilute its brand, and force it to compete more aggressively against diversified cloud-based enterprise communications platforms like Microsoft Teams.
What happened to RingCentral?
RingCentral generated more stable growth than Zoom over the past two years because it primarily served businesses instead of mainstream customers. The pandemic forced businesses to continue relying on its cloud-based collaboration services, but it also temporary throttled its growth in new customers.
As a result, RingCentral didn't experience a huge growth spurt or a slowdown during the pandemic. Instead, it grew at a steady pace -- and its growth accelerated after the pandemic ended and it started to lock in more businesses again.
RingCentral's revenue rose 31% to $1.2 billion in 2020 and grew 35% to $1.6 billion in 2021. It expects its revenue to increase another 27% to 28% this year, even though it admitted that its larger customers were starting to exhibit more "cautious buying behavior" as they assessed the macro headwinds.
RingCentral still isn't profitable on a GAAP basis. But on a non-GAAP basis, its earnings per share rose 20% in 2020, increased 37% in 2021, and it expects 43% to 46% growth this year. Like Zoom, RingCentral believes the secular shift toward remote and hybrid work will drive its long-term growth.
However, the bears think that RingCentral will struggle as Zoom, Microsoft, and other companies gradually creep into its backyard with audio-only calls, cloud-based storage services, and other collaboration tools. Zoom also plans to stop licensing its technology to RingCentral for its videoconferencing services in the near future, and the imminent end of that partnership (which started in 2013) has forced RingCentral to build its own first-party videoconferencing platform. Those investments could squeeze its near-term margins.
Which cloud stock is the better value?
Zoom's stock trades at 21 times forward earnings, while RingCentral has a much lower forward price-to-earnings ratio of 14. That lower valuation, along with its more broadly diversified business and higher growth rates, make RingCentral a much better investment in the disruption of legacy enterprise communications services than Zoom, which has yet to prove that it can actually evolve into a more diversified cloud-based communications giant.
