Goldman Sachs initiates coverage of US-listed communication stocks; buy these 2 shares for 31% returns

Goldman Sachs has initiated the coverage of communication and collaboration sector stocks listed on Wall Street, pinning a ‘Buy’ rating on RingCentral and Twilio.

Communication stocks in the US. (Image: REUTERS)

Goldman Sachs has initiated the coverage of communication and collaboration sector stocks listed on Wall Street, pinning a ‘Buy’ rating on RingCentral and Twilio. “Our sector view is that with 7% cloud penetration against 20% overall average, the sector is attractive,” Goldman Sachs said in a note. “According to our TAM analysis, at $270 billion+ out of $1 trillion total software, the sector represents close to 30% of overall available long-term software spend. Most of this spend is incremental or to replace hardware and services, continuing the general trend of software expansion into the broader economy,” they added.

Target: $240

RingCentral is a provider of cloud-based communications and collaboration solutions for businesses. The stock of the company has fallen nearly 50% this year after having hit an all-time high in February. Analysts at Goldman Sachs believe that RingCentral offers investors high visibility into multi-year durable high revenue growth in a large market with a much improved competitive position. “While the spotlight during the pandemic was largely centered on Zoom Video and Microsoft Teams, in our view, RingCentral has quietly built both a significant technology and go-to-market moat,” they added. 

In terms of growth, RingCentral has grown by 31.7% in 2018, 33.4% in 2019, finished 2020 at 33%. “We believe RNG is positioned to grow sustainably at 30%+ over multiple years as those partnerships in combination give RingCentral preferential access to 200mn+ PBX seats,” the report said. Analysts believe that RingCentral trades at 9.5x NTM revs, below its three-year average of ~15x. “We believe current stock levels represent a compelling entry point,” it added. The target price implies at 25% upside from current levels. 

Target: $350

Twilio is a cloud communication platform company that allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions using its web service API. The stock has tanked 20% so far in 2021. “Our view is supported by our DX survey – when we asked CIOs which vendors will gain or lose share in DX budgets, amongst all vendors, Twilio’s performance was strong, with net strength of +29% defined as % gaining share less % losing share,” Goldman Sachs said. 

The company is believed to already have a $100 billion+ total addressable market. “Management’s guidance for 30%+ organic revenue growth for each of the next four years both projects confidence and reflects the trend of the confluence of business applications and communications services, opening a myriad of new use cases.” For the $350 target price, Goldman Sachs assumes a perpetuity growth rate of 1.2%, 8.0% WACC and their Q5-Q8 EV/Sales analysis assumes 14x EV/Sales, in-line with Rule of 40 to 60 peers. To meet the set target price, Twilio shares will have to rally 31% from current levels. 

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