The software industry is flourishing, fueled by the growing use of public cloud services across various enterprises. Thus, investors could consider adding fundamentally sound cloud communication stocks, Twilio Inc. (TWLO) and RingCentral, Inc. (RNG), for solid returns in 2024.
The increasing use of public cloud services is a key factor anticipated to propel the demand for software as a service (SaaS). Due to the high costs associated with on-premises software deployment, many businesses are transitioning to the SaaS model. The U.S. SaaS market is predicted to grow at a CAGR of 13.5% by 2034.
Moreover, government regulations to reduce carbon emissions encourage businesses to adopt cloud-based services, which is expected to enhance the segment's growth prospects. Additionally, the affordability of cloud-based subscriptions will likely lead to a more widespread adoption of hybrid cloud deployment.
Considering these factors, let’s take a look at the fundamentals of the two cloud communication stock picks.
Twilio Inc. (TWLO)
TWLO and its subsidiaries provide customer engagement platform solutions in the United States and internationally. The company operates through two segments: Twilio Communications and Twilio Segment.
On June 5, 2024, TWLO announced the launch of Linked Audiences and the Segment Data Graph, enhancing Twilio Segment’s interoperability with data platforms and warehouses. These new features allow businesses to build audiences and enrich customer profiles with data, improving real-time marketing and AI model training.
TWLO looks undervalued at the current price level. Its forward EV/EBITDA of 9.18x is 30.7% lower than the industry average of 13.24x. Its forward EV/EBIT multiple of 11.26 is 39.1% lower than the industry average of 18.49.
TWLO’s revenue for the fiscal second quarter ended June 30, 2024, grew 4.3% year-over-year to $1.08 billion. It reported a non-GAAP income from operations of $175.32 million, up 45.9% from the prior year’s quarter. Additionally, the company’s non-GAAP net income attributable to common stockholders came in at $150.12 million, or $0.87 per share, up 48.9% and 61.1% year-over-year, respectively.
Street expects TWLO’s revenue to increase 5.7% year-over-year to $1.09 billion for the third quarter ending September 2024. The company’s EPS for the same quarter is expected to grow 47.6% year-over-year to $0.86. Also, TWLO surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Over the past six months, the stock has gained 6.5%, closing the last trading session at $59.10.
TWLO’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TWLO has a B grade for Growth, Value, and Sentiment. It is ranked #7 out of 19 stocks in the A-rated Software - SAAS industry.
Click here to access the additional TWLO ratings (Momentum, Stability, and Quality).
RingCentral, Inc. (RNG)
RNG provides cloud communications, video meetings, collaboration, and contact center SaaS solutions worldwide. Its portfolio comprises RingCentral Message Video Phone (MVP), RingCentral Contract Center, RingCentral Engage Digital, RingCentral Engage Voice, RingCentral Video, and RingCentral professional services.
On July 18, 2024, RNG, a leading provider of AI-driven cloud business communications, contact center, video and hybrid event solutions, announced the transformative impact its solutions have had on the employee and patient experience at MedCare Equipment, a leading provider of home and durable medical equipment.
Leveraging RingEX, RNG’s flagship unified communications solution, and RingSense for Sales, MedCare Equipment had achieved a 40% reduction in average call wait times and a 92% time savings on agent call reviews and agent coaching.
On May 15, 2024, RNG and Vodafone Business Ireland announced the launch of Vodafone Business UC with RingCentral to organizations of all sizes in Ireland. This solution enables businesses to facilitate seamless communication and collaboration for their workforces from virtually any device, anywhere, at any time.
With this offering, Vodafone Business Ireland and RNG are empowering businesses to embrace the evolving landscape of hybrid work.
RNG is also trading at a cheaper valuation than its peers. Its forward EV/EBITDA of 7.69x is 41.9% lower than the industry average of 13.24x, and its forward EV/EBIT multiple of 9.18 is 50.4% lower than the industry average of 18.49.
RNG’s total revenues for the fiscal second quarter ended June 30, 2024, grew 9.9% year-over-year to $592.91 million. Its non-GAAP income from operations rose 18.9% over the prior-year quarter to $124.19 million.
Additionally, the company’s non-GAAP net income and non-GAAP net income per share were $86.20 million and $0.91, respectively, representing increases of 7.7% and 9.6% year-over-year.
Analysts expect RNG’s revenue for the third quarter (ending September 2024) to increase 7.9% year-over-year to $602.17 million, while its EPS is expected to grow 18.2% year-over-year to $0.92. In addition, the company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past month, the stock has gained 18.3% to close the last trading session at $33.02.
RNG’s robust fundamentals are reflected in its POWR Ratings. Its overall rating is A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and a B for Value and Quality. RNG is ranked #4 out of 40 stocks in the Software - Business industry.
Beyond what is stated above, we’ve also rated RNG for Stability, Sentiment, and Momentum. Get all RNG ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
TWLO shares were trading at $59.85 per share on Thursday morning, up $0.84 (+1.42%). Year-to-date, TWLO has declined -21.12%, versus a 11.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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