How You Could Get a Piece of One Cloud Firm’s $500 Million Deal

0 | By Michael A. Robinson

My wife and I recently traveled nearly 20 hours to return from a trip to Barcelona only to get out of bed the next morning and have no electricity.

Here’s the thing, when you don’t have power, you don’t have comms. We had no Wifi since the provider didn’t have enough back up power in place.

Even more frustrating was that our smart phones were all but useless. Forget surfing the Web to get information about PG&E Corp. (PCG) and its planned shutoffs.

On top of all that, we had no real cell service, meaning we couldn’t make calls from our home. Our neighbors said that their land lines were also useless.

That’s when it really drove home something that we all take for granted -modern communications like text messages, email and phones are totally integral to our lives.

They’re so important that the goal of unifying all these services recently led to a $500 million deal for a cloud-based communications firm.

Today, I’m going to reveal the winner of this new pact and show you why it will more than triple the market’s returns…

We’re Living in a Telecom World

I have to say I was bummed when I found out that the phones, email, Web, and texting were all no gos in a power shutdown.

And for those of you not up on the news, these are happening around northern California because PG&E has been linked to several infernos that have killed dozens and caused several billion in damages.

To make sure I was prepared, I went out and bought a powerful portable generator and plenty of high-quality extension cords.

After the first shut down, I ran a power line to my office to hook up my cable modem and router. What I got was…crickets. The broadband cable was dead.

Since I live in a semi-rural hills community overlooking San Franciso Bay, I rely on Wi-Fi calling to use my iPhone. In a shutdown, we have only one bar.

Basically, we had no way to communicate with the outside world. To find coffee, I had to get in my car and drive around and locate a place that was open.

In other words, our modern society runs on electronic communications. And because businesses are so dependent on them, many have started to pursue the holy grail of the field, what is known as “unified communications.” That term refers to having phone and other services that can all be linked together. Increasingly, this is being done moving in the cloud.

That process has given rise to a new field known as Unified Communications as a Service (UCaaS). For businesses, the idea is to get rid of old-school PBX phone systems and replace them with fully digital, cloud-based platforms.

Make no mistake, this is now a massive and growing tech field. UCaaS was a $17.35 billion market in 2016. According to Markets&Markets, the sector will grow by 10.6% a year through 2021, when it will be worth $28.69 billion.

Making The Best Connections

Enter RingCentral Inc. (RNG), the clear leader in this field. The appeal of UCaaS is partly about cost-saving. Moving communications hubs to the cloud allows clients to lower the costs of operating their phone services while, at the same time, expanding what they are able to do.

A simple monthly fee brings access to all the features RingCentral provides. These include remote file access and conference call management, as well as all of the other bells and whistles you’d expect with a top-end corporate communications platform.

RingCentral’s UCaaS has 99.999% uptime, better than any on-premises hardware you can buy. And, in the event of a catastrophe, your offices could literally be under water – or without power – and your people could still be answering calls from another location.

And yet, despite this very impressive operation, most investors had barely heard of Ring Central.

But all that changed early last month when the firm announced a huge new deal with Avaya Holdings Corp. (AVYA). The company is a global leader in providing unified communications, contact support and real-time video collaboration.

Under the pact, RingCentral becomes the exclusive provider of various communication services for Avaya. The two companies said they will jointly develop programs to support Avaya’s global sales and partner network.

As part of the deal, RingCentral gains access to Avaya’s more than 100 million customers and 4,700 channel partners. Avaya counts 90% of Fortune 100 firms as clients and operates in 180 countries.

In return, RingCentral is providing a unified solution for voice, video and team messages. It’s doing this through an open platform supported by more than 23,000 global developers.

The deal is a huge jump for RingCentral, which had just two million users when it joined forces with Avaya. RingCentral is investing $125 million in Avaya for a 6% ownership stake and advancing its partner $375 million for future commissions and some licensing rights.

Investors love the deal. When it was announced on Oct. 5, RingCentral’s stock jumped 28%. That capped a two-year run of 292%, a period in which it beat the S&P 500 by 1,760%.

But don’t worry, I still see plenty of upside ahead. After all, RingCentral is a great company with a deep list of top-tier clients to prove it.

Let’s start with Amazon Web Services, the world’s largest cloud computing platform. It launched Alexa for Business roughly two years ago.

With this voice-controlled digital assistant, users can perform a wide range of corporate tasks-without being anywhere new a computer keyboard. To pull it off, Amazon turned to RingCentral to power the platform.

While the Avaya and Amazon partnerships are game changers, RingCentral also has strong relationships with many other top firms.

AirBnB, Intuit Inc. (INTU), Oracle Corp. (ORCL), Inc. (CRM), Microsoft Corp. (MSFT), and Alphabet Inc. (GOOG) are all part of the RingCentral ecosystem.

No wonder RingCentral is such a great growth firm. Over the past three years, it has averaged per-share earnings growth of an astounding 160%.

That means they are doubling every six months or so. To be conservative, let’s cut that by 60%. We still see profits growing by 64% a year.

At that rate, I think it’s pretty clear the stock can at least triple the overall market’s return over the next five years.

Add it all up and you can see that a stock like RingCentral can give your portfolio the kind of returns that are just plain off the hook.

Cheers and good investing,

Michael A. Robinson

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