China-based multi-capability cloud-based communications solutions provider Cloopen Group Holding Limited’s (RAAS) offerings include a communications platform as a service (CPaaS) and cloud-based contact centers (cloud-based CC). The stock hit an all-time $59 price high on its stock market debut on February 9, 2021. But the shares have plunged 88.4% in price since. Furthermore, RAAS’ stock has lost 71.9% over the past six months and 41.6% over the past three months to close yesterday’s trading session at $5.56.

RAAS’ acquisition of EliteCRM earlier this year helped it improve its product pipeline and attract more large-enterprise customers. The company also announced that it expects its revenues to be between RMB275 million ($42.54 million) and RMB278 million ($43 million) in the third quarter, representing an increase of 43.8% - 45.3% year-over-year. 

However, this outlook is subject to uncertainty and substantial change, based on factors such as the impact of the COVID-19 outbreak and the new regulations on K-12 after-school tutoring in China. Also, RAAS’ losses widened in the second quarter. So, its near-term prospects are at best questionable.

Click here to check out our Software Industry Report for 2021

Here’s what could influence RAAS’ performance in the near term:

Uncertain Regulatory Environment

Following the halt of Ant Group’s IPO in November last year, China’s authorities have taken several other steps to increase regulation, starting with a tech crackdown earlier this year, which wiped out billions of dollars, and followed by an education sector crackdown. Also, China's National People's Congress passed a new personal data privacy law last month, which is expected to be implemented from November 1.

China is also considering enforcing a rule requiring data-rich companies  to hand over management and supervision of their data to third-party firms if they want U.S. stock listings. These measures are expected to impact RAAS’ business operations negatively.

Top-Line Growth Doesn’t Translate into Bottom Line Improvement

RAAS’ total revenues increased 35.9% sequentially to $42.42 million for the second quarter, ended June 30, 2021, driven by robust performance across all its product lines. However, the company’s cost of revenues increased 36.8% year-over-year to $24.13 million, due primarily  to increased telecommunications resources costs, outsourcing costs, and staff costs. While its operating loss increased 65.8% year-over-year to $14.93 million, its net loss came in at $16.36 million, up 69.9% year-over-year. Also, its loss per share was RMB0.33, versusRMB0.87 in the year-ago period.

Ongoing Investigation

Several law firms, including Johnson Fistel, LLP and Bronstein, Gewirtz & Grossman, LLC, have been investigating RAAS over the past few months for potential federal securities laws violation. RAAS is being investigated regarding whether company's filings with the U.S. Securities and Exchange Commission in connection with its February 2021 IPO and subsequent investor communications contained untrue material facts or misleading facts.

POWR Ratings Reflect Bleak Prospects

RAAS has an overall rating of D which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. RAAS has a C grade for Value, which is in sync with its 5.62x forward P/S, which is  34.8% higher than the 4.17x industry average. The stock has a D grade for Stability.

RAAS has a D grade for Quality also. This is consistent with its negative values for trailing-12-month ROCE, ROTC, and ROTA versus  the  8.29%, 4.80%, and 3.59%  respective industry averages. RAAS is ranked #45 out of 60 stocks in the Software – Business industry. In addition to the POWR Rating grades we’ve just highlighted, we’ve also graded RAAS for Growth, Momentum, and Sentiment. Get all the RAAS ratings here.

Bottom Line

RAAS is an emerging company in the growing software industry. It faces intense competition from other top players in the industry, such as U.S.-based Twilio Inc. (TWLO), which provides similar services. In addition, analysts expect RAAS’ EPS to remain negative in its fiscal year 2021 and 2022. So, we think it could be wise to steer clear of this stock now.

How Does Cloopen Group (RAAS) Stack Up Against its Peers?

While RAAS has an overall POWR Rating of D, one  might want to check out these two A-rated (Strong Buy) stocks in the same industry: SS&C Technologies Holdings, Inc. (SSNC) and Software Aktiengesellschaft (STWRY).

Click here to check out our Software Industry Report for 2021

RAAS shares were trading at $5.06 per share on Wednesday morning, down $0.50 (-8.99%). Year-to-date, RAAS has declined -89.46%, versus a 20.93% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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