Stay-at-home tech stocks, which rallied significantly in 2020 after the onset of the pandemic, were hit hard in 2021, significantly underperforming its benchmark, the Technology Select Sector SPDR ETF (XLK), which has gained 33% YTD. 

However, rising concerns amid the highly transmissive Omicron variant could stimulate demand for those stocks.  Which is why today I’ll analyze and compare two stay-at-home software stocks, RingCentral (RNG) and Zoom Video Communications (ZM), to determine which is currently the better investment.

Founded in 1999, RNG is a California-based company that provides businesses with communication software in North America.  ZM is a video teleconferencing software company that enables users to hold virtual meetings, chat among peers, make phone calls and host online events, such as webinars. Year-to-Date (YTD), Zoom stock declined 44%, outperforming rival RingCentral, which dropped 49% over the same period. 

Recent Developments 

On December 13th, RingCentral announced a $100 million share buyback program. However, the company has recently seen a downgrade at Morgan Stanley to Equalweight, with the price target cut from $390 to $220 amid the absence of short-term catalysts and management turnover.

On December 6th, Zoom, along with Salesforce and ServiceNow invested in a call center software company, known as Genesys, helping it raise $580 million. With the rapidly growing demand for call center software, ZM's investment is more than justified, especially after ZM’s failed acquisition of Five9. As a result, the company should benefit over the long term. 

Recent‌ ‌Quarterly‌ ‌Performance‌ ‌&‌ ‌Analysts’‌ ‌Estimates‌ ‌

RingCentral's total revenues for its fiscal third quarter of 2021, ended September 30th, 2021, increased 36.5% year-over-year to $415 million, beating Wall Street estimates by $21.55 million. This increase was primarily driven by a 38% growth in subscription revenues to $385.44 million, which came from the acquisition of new customers and higher offerings to the current customer base. The company's Non-GAAP EPS stood at $0.36, beating Wall Street consensus by $0.03. 

Also, the company increased its Q4 and FY2021 guidance, adding a lot of optimism in terms of its growth prospects. Currently, RNG's EPS for the fourth quarter is expected to increase by about 28% year-over-year, coming in at $0.37. The company's top line for the next quarter is estimated to lift 30.00% year-over-year to $434.94 million.

Although Zoom reported better-than-expected Q3 earnings, its shares plunged over 17% amid investors’ concerns regarding ZM’s 2022 growth rates. In Q3, Zoom Video Communications' revenue increased about 35% year-over-year to $1.05 billion, primarily driven by higher subscription services provided to new customers. Moreover, the company was able to beat Wall Street revenue estimates by $30 million. 

Its gross profit grew 50% from the same period last year to $779.8 million, with a gross margin expansion from 67% a year ago to 74% as of Q3FY2022. Also, ZM reported a Non-GAAP EPS of $1.11, topping Wall Street projections by $0.01. 

For the fourth fiscal quarter of 2022, the analysts expect ZM's EPS to stand at $1.05, which is a modest decrease compared to $1.22 a year ago. However, it is worth mentioning that the company has a perfect earnings beat record, topping consensus in the past eleventh consecutive quarters. Besides, an $1.05 billion average revenue projection for Q4FY2022 indicates a 19.40% growth.

Comparing Valuations & Profitability 

RingCentral's Forward P/E currently stands at 145.66x, which is significantly higher than Zoom, whose multiple is presently at 39.33x. However, both communications software companies look overvalued compared to the sector's median of 24.60x.

When it comes to the Forward EV/EBITDA multiple, RNG's multiple of 86.53x is about 2.75x higher than ZM's 31.44x. Both companies look expensive compared to the sector’s median of 16.51x.

Finally, Zoom has a better margins profile with a gross profit margin TTM of 72.78%, slightly exceeding the RingCentral respective figure of 72.75%. ​Its EBITDA margin of 30.41% and net income margin of 29.29% are also well above both the sector's median and RNG's negative values. 

The Bottom Line 

Putting it all together, I believe that Zoom is currently a better investment than RingCentral. Zoom delivered the same revenue growth rate in Q3 and topped consensus. In addition, the company continues to improve its superior margins. Although 2022 growth concerns remain, the company looks significantly cheaper from a valuation standpoint, providing investors with a higher margin of safety.

RNG shares were trading at $192.08 per share on Monday afternoon, down $0.38 (-0.20%). Year-to-date, RNG has declined -49.32%, versus a 29.08% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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