The communication software-as-a-service sector is a more than $60-billion market that has several bullish trends on which investors can capitalize in the long-term, according to a BofA Securities analyst.
On Tuesday, BofA Securities performed a deep dive into communication software companies and reinstated coverage of several leading stocks.
The BofA Analyst: Analyst Daniel Bartus reinstated coverage of the following stocks:
- Zoom Video Communications Inc (NASDAQ:ZM): Buy rating, $480 price target.
- RingCentral Inc (NYSE:RNG): Buy rating, $450 price target.
- Twilio Inc (NYSE:TWLO): Buy rating, $480 price target.
- 8×8, Inc. (NYSE:EGHT): Neutral rating, $39 price target.
- Five9 Inc (NASDAQ:FIVN): Underperform rating, $190 target.
Check out Benzinga’s coverage of the Direxion Work From Home ETF, which counts Zoom, RingCentral and 8×8 among its holdings.
The Takeaways: The migration to the cloud is starting to accelerate, Bartus said.
Artificial intelligence and customer experience are becoming more strategic for today’s businesses, the analyst said.
And the COVID-19 pandemic pulled forward the digital transformation of the global economy, a significant tailwind for these communication software stocks, he said.
Unified communication as a service — UCaaS — leader RingCentral is Bartus’ top stock pick in the group, the analyst said.
On top of RingCentral’s track record of 30%+ revenue growth 2017-2020, we think the market inflection and partnership contributions are likely to drive upside to management’s 25% growth target in 2021.”
Despite extremely difficult comps in 2021, he said Zoom Video is here to stay and has plenty of long-term growth ahead.
“In our view, the current negative sentiment around reopening churn opens a particularly attractive buying opportunity and the valuation is more supportive with the stock trading at 20x our CY22 EV/Sales vs peers at 18-19x,” Bartus said.
Bartus is also bullish on Twilio and said the stock’s premium valuation is justified given its potential for sustainable revenue growth of above 30%.
“We believe Twilio’s valuation is justified by its higher growth profile, the path for long-term margin expansion, and Twilio being a category-winner.”
Related Link: If You Invested $1,000 In Zoom Video Stock One Year Ago, Here’s How Much You’d Have Now
Benzinga’s Take: As with many high-growth tech stocks in the market these days, additional upside for these communication software stocks will hinge on the answer to two questions.
How much future growth is already priced into the stocks at their current stretched valuations? And will these companies be able to live up to a very high bar of long-term growth expectations in the next several years?
Photo courtesy of Zoom.