Kiplinger\'s Personal Finance 03.2020

36 KIPLINGER’S PERSONAL FINANCE^ 03/2020

INVESTING

firm Wasatch Global Investors. “We

think Five9 will be the dominator in

this market.”

Five9 has grown at a torrid pace,

boosting revenue by an annualized

25% from 2013 through 2018 while

steadily improving profitability. The

firm’s earnings are still nonexistent,

but the annual trend has been solidly

in the right direction since Five9 went

public in 2014. Sahota believes the

company should continue to increase

profitability while boosting sales at a

robust, mid-20s annual percentage

rate over the next three to five years.

RingCentral (RNG, $169) If RingCentral

has a say, you may soon bid goodbye

to your old desktop phone. The firm’s

software allows workers to communi-

cate via phone, text, video conference,

instant message and more over one

web-based platform. RingCentral,

which charges a subscription fee per

“seat” (each end user, essentially), esti-

mates the company serves 3 million of

the 10 million seats that have already

migrated to the cloud. But companies

providing the old-fashioned model

serve some 400 million to 500 million

seats. Helping matters for RingCentral

is a recently inked agreement with leg-

acy office communications firm Avaya

to become the firm’s exclusive cloud

software provider, giving RingCentral

access to Avaya’s cache of more than

100 million seats.

RingCentral’s stock has jumped 45%

since the deal was announced in Octo-

ber, aided by the firm posting better-

than-expected third-quarter results

(though profits are still in the red by

traditional accounting standards).

Wall Street is underestimating the

impact of the deal, which could spark

31% annual growth in subscription

revenue through 2023, to $2.4 billion,

says Jefferies analyst Samad Samana.

RingCentral is Samana’s contribution

to Jefferies’ “Franchise Pick” list—the

buy-rated stocks the firm’s analysts

are most bullish on. ■

CONTACT THE AUTHOR AT [email protected].

both standards, expensive. But Black-

Line trades at an enterprise value

(generally thought of as what it would

cost to buy a company outright) that

is 7.7 times estimated 2020 revenues,

according to analysts at investment

firm William Blair. That’s a discount

to rival firms, which trade at a median

multiple of 9.6, they say. And given

BlackLine’s potential to boost sales

and expand profit margins at a faster

rate than its peers, the stock deserves

a “buy” (outperform) rating, they say.

Five9 (FIVN, $66) Whether you contact

a business over the phone or use an

online chat, people on the other end of

those interactions use software to help

assist customers. Five9 is a leader in

providing such software in the cloud—

a business known as contact center as

a service. Five9’s technology improves

customer experience, for instance, by

using artificial intelligence to route

customer calls to the most appropriate

agent among the available pool.

Five9 estimates that only about 15%

of call center agents have converted

to the cloud and says the potential

market for the industry is $24 billion

in annual revenues. That gives Five9

“open-field running for the foresee-

able future,” says Jagjit Sahota, an

investment analyst at mutual fund

BlackLine (BL, $52) BlackLine is aiming

to revolutionize the way companies

keep their books with software that

automates and streamlines the finan-

cial and accounting practices that go

into the closing process at the end of

each accounting period. The market

for such services amounts to some

$18.5 billion in annual revenue, ac-

cording to market research firm and

consultancy Frost & Sullivan. Black-

Line’s estimated $285 million in 2019

revenue is a mere nibble out of a huge

pie, yet the firm, which began trading

publicly only in 2016, is nonetheless

a leading player in the industry, with

best-in-class features and functional-

ity, says DF Dent’s Gary Wu.

Shares sit below their September

2018 high due to investor concerns

over slowing sales growth. But the

slowdown was at least partially by

design, says Wu. Rather than shooting

for hyperexpansion, BlackLine spent

the past two years building out the

firm’s team that helps customers with

implementing the software. With a

revamped team in place, Wu expects

sales growth to pick back up in 2020.

Measured by generally accepted ac-

counting principles, BlackLine has no

earnings to speak of, and by the firm’s

own (non-GAAP) accounting, profits

are meager. That makes the stock, by

LOOK BEYOND THE TECH TITANS

Small-Cap Picks

Large-company tech stocks have trumped their small-cap cousins for much of the bull

market, but these more-speculative issues could close the gap.

Company/Fund Symbol

Share

price

Exp.

ratio 1 yr. 3 yrs.

Annual

revenue†

(in millions)

Invesco S&P SmallCap Info Tech ETF PSCT $96 0.29% 39.2% 11.7% —

DF Dent Small Cap Growth Inv DFDSX — 1.05 36.3 15.8 —

USAA Science & Technology Fund USSCX — 1.02 37.8 21.5 —

BlackLine Inc BL 52 — 25.9 23.1 $287

Five9 Inc FIVN 66 — 50.0 66.6 322

RingCentral Inc RNG 169 — 104.6 101.6 888

S&P SMALLCAP 600 INDEX 22.8% 8.4%

As of December 31, 2019. †Based on analyst estimates for calendar year 2019. — Not applicable.

SOURCE: Morningstar, Inc., Zacks.

Annualized

total return