RingCentral rises as Morgan Stanley upgrades, citing 'overly negative investor sentiment'
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RingCentral (NYSE:RNG) shares rose nearly 4% in premarket trading on Wednesday as Morgan Stanley upgraded the communications software firm, citing an "overly negative investor sentiment" despite the company's earnings and cash flow leverage.
A group of analysts noted that investor sentiment in the communications software space has changed over the past 18 months, as commoditization concerns have increased, but there are still companies that have ample opportunity and some of the declines in their respective shares may be overdone.
"...With the majority of this space trading at a meaningful discount to software averages, we think valuations today discount ability to show earnings upside or see catalyst driven events impact names," the analysts wrote.
In addition to upgrading Ring (RNG) to overweight from equal-weight, the firm also lowered its price target to $50. It also lowered its price targets on Twilio (TWLO), Zoom Communications (ZM) and raised them on Bandwidth (BAND), Five9 (FIVN) and 8x8 (EGHT). 
Morgan Stanley noted that it is still overweight on Twilio (TWLO) and that Five9 (FIVN) and Nice (NICE) are the "highest quality names within the universe," but the latter two have limited upside due to "fairly positive" sentiment. 
Regarding RingCentral (RNG), the analysts noted the company has "the ability to show more flex to [its] business model" than some of its peers because of its "outsized commissions" that it has paid historically to partners. 
The analysts also pointed out that Ring (RNG) has had "historically weak sentiment" and there are concerns that it could face pressure on its average revenue per user, but that is likely built into the valuation of the stock already, as it trades at less than 2 times estimated 2024 revenue and roughly 11 times estimated 2024 earnings. 
"While top line could face pressures due to macro, we think there is enough earnings / cash flow leverage to leave earnings estimates generally as is, which creates opportunity for investors," the analysts wrote, adding that the company has roughly 220 basis points of leverage that it showed this year and another 350 basis points next year.
Last month, RingCentral (RNG) reported third-quarter results and also said that it would cut 10% of its employees. 
Analysts are largely bullish on RingCentral (RNG). It has a BUY ârating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates RNG a HOLD.