Sell-Side Sees Major Upside For RingCentral In Avaya Deal

Sell-side analysts were bullish Monday on RingCentral Inc. RNG following the announcement last week of a “game-changing partnership” with Avaya Holdings Corp. AVYA that could dramatically boost RingCentral’s market share and stock price.

Ring Central investors seemed to agree, continuing to push the stock higher Monday.

The Analysts

JPMorgan’s Sterling Auty upgraded RingCentral from Neutral to Overweight and raised the price target from $143 to $225.

Bank of America Merrill Lynch analyst Nikolay Beliov reiterated a Buy rating on the stock and raised the target price from $150 to $180.

The Takeaways

The partnership announced Thursday lets Avaya sell RingCentral’s cloud communications service to Avaya’s 100-million-plus customers. That gives RingCentral immediate access to about a quarter of the market for the service, known as Unified Communications as a Service, or UCaaS.

If RingCentral gets as little as 3% of Avaya’s customer base, it would be worth an incremental $82 a share, Auty said in a Monday upgrade note. 

“We applaud the contract structure ... as it gives both attractive economics to both sides, as well as protections for RNG,” the analyst said. 

Very Large Economic Benefits

The deal has “potentially very large economic benefits” to RingCentral, said Bank of America's Beliov. 

It’s not clear exactly when the partnership will start to impact RingCentral Revenues, "but the long term benefits are compelling,” the analyst said, citing revenue growth, accretive margins, lower churn and the opportunity to invest incremental profits.

At current per user pricing, another 1 million users could bring in $360 million in revenue for RingCentral, Beliov said.

Gentile: Downside Risk

At least one investor disagreed with the sell-side's enthusiasm. 

Activist Investor Guy Gentile wrote in a blog post Monday that he sees “major downside” risk — possibly 30% — in RingCentral, which has traded up heavily in the last few trading sessions.

“If you are long, this would be a good time to take some profits and wait for a pullback to get back in,” Gentile wrote.

Price Action

RingCentral shares were up 6.07% at $173.21 at the time of publication. 

Related Links:

Avaya Rallies Following Deal With RingCentral

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Photo courtesy of Avaya.