RingCentral (RNG) reported stronger Q3 results, with subscription growth accelerating for a third consecutive quarter, broader AI adoption and higher-than-expected profitability, Morgan Stanley said Friday in a note.
Subscription growth increased to 6%, ending a six-quarter streak below that level. Q4 subscription revenue guidance was about 55 basis points above consensus, implying 5.4% growth at the midpoint and representing a higher initial outlook than in previous quarters, according to the note.
Annual recurring revenue from customers using at least one native paid AI product is approaching 15% of total ARR, up from nearly 13% in Q2 and 10% in Q1, and has doubled year over year, the note added.
Management sees significant room to expand AI monetization beyond early adoption, as AI presently handles a small fraction of the billions of calls flowing through the company's network, while AIR Pro enables higher-value, more complex workflows, Morgan Stanley said.
The investment firm said structural margin expansion, declining stock-based compensation and capital returns should support durable free cash flow per share growth. However, with shares trading at a premium to peers, further upside increasingly depends on upward earnings estimate revisions.
Morgan Stanley maintained its equal-weight rating on RingCentral and raised its price target to $91 from $41.
Shares of RingCentral rose nearly 7% in late Friday morning trading.
Price: 84.87, Change: +5.44, Percent Change: +6.86
