RingCentral's Enterprise Market Investments Could Dial Up Continued Growth The Next Few Years

Morgan Stanley’s Meta Marshall believes the investments made by RingCentral Inc RNG to move into the enterprise market would start to bear fruit in 2017, allowing the company to sustain a growth rate of more than 25 percent for the next few years.

In a note out Tuesday, the analyst upgraded the stock from Equal-weight to Overweight, while raising the price target from $28 to $33.

Outsized Growth

Marshall expects RingCentral’s subscription revenue to grow 27 percent in 2017, which is almost 50 percent higher than the expected growth rate, despite headwinds.

The analyst believes this “outsized growth” is being driven by higher traction upmarket, with the company having made significant investments in enterprise since the end of 2015.

“We think the market underestimates the traction the company has already made upmarket and how much that business could grow in '17,” Marshall stated.

Related Link: RingCentral Announces PlanetOne Communications as Premier Master Agent Partner to Transition Enterprises to Cloud Communication Solutions

Dealing With Headwinds

One of the headwinds the analyst noted was the relationship with AT&T Inc. T, which was unlikely to contribute to growth in 2017, given that AT&T markets its own products.

At the same time, Marshall believes RingCentral has learned to mitigate this risk, as seen by the impact over the last two quarters, where the company was able to sustain 25 percent year on year subscriber growth.

“Additionally, they are a year into investments upmarket and should see ent (enterprise) traction increase, causing avg rev/S&M (average revenue/sales & marketing) invested to continue to rise and S&M effectiveness to stabilize,” the analyst went on to say.

Due to this, Marshall believes RingCentral would be able to outgrow the market and work towards achieving its revenue target of $1 billion by 2020-2021.