It's RingCentral (NYSE: RNG) You Want In Your 2021 Portfolio, Not Zoom (NASDAQ: ZM)

As investors start to review their portfolio’s performance from the year ending and get ready for a new round in a couple of weeks, work-from-home stocks are sure to be top of mind for many. The onset of the COVID pandemic in February and March accelerated many of those companies to levels of growth previously not forecasted and their stocks understandably went parabolic. But even with a COVID vaccine starting to be rolled out, there’s still just as much opportunity to be had in 2021 if you know where to look.

RingCentral (NYSE: RNG) is a cloud-based communications platform used by businesses to allow employees to make and take calls from their computers. In other words, a textbook work-from-home stock at first glance. Their shares were up 200% from the start of 2019 through March of this year so we're running with some decent momentum before Q1’s crash clipped their wings. But while they were able to undo all of the damage by May, unlike most of their peers in the work-from-home space, they didn’t really kick on from there. They topped out at around 20% higher than their pre-COVID levels and then traded sideways in a tight range through the summer and fall.

Diverging Fortunes

At the start of this month, shares were still up 75% on the year, and if that was where they tapped out for 2020, how bad. It’s not an annual return to be sniffed at all things considered but compared to competitors like Zoom Video (NASDAQ: ZM) it would have been a bitter pill to take. Zoom was the company that came to encapsulate the rally and hype seen in work-from-home stocks this year. From the start of the year through early October, shares of the San Jose based company popped more than 700%. RingCentral investors must have been kicking themselves for backing the wrong horse.

But the closer we get to the end of the year, the more it looks like RingCentral is going to finish on the stronger foot. Their shares have rallied more than 30% in the past fortnight and are crushing Zoom over the past two months. Since October, RingCentral has tacked on 40% compared to the 25% that Zoom’s have given up. That’s a considerable divergence in the fortunes of two communications software companies and investors getting ready for a new year would do well to take notice.

Only yesterday, Morgan Stanley upgraded RingCentral shares to Overweight, calling it a "pure-play leader” that was “showing top-line acceleration from partnerships ramping”. They also slapped a fresh price target of $420 onto the stock which is about 10% higher than the all-time highs it closed at last night. The previous day, Mizuho were also out with bullish comments and a price target raise.

Looking Ahead

On the flip side, Zoom is fast becoming an over hyped and bloated tech name, with a vicious price-to-earnings ratio of 280 and more downgrades of late than upgrades. JPMorgan moved them down to Neutral earlier this month as the vaccine started being delivered, citing concerns about Zoom’s ability to maintain such a high valuation in a post pandemic world. Credit Suisse went a step further earlier this month and maintained their Underperform rating on the stock which, ominously, has been in place since April.

Of the two work-from-home stocks, Zoom was the better buy for 2020. There can be no doubt about that. But it looks like it’s had its moment in the sun and if anything flew a little too close to it. RingCentral on the other hand has the appearance of a stock that’s just getting going, and I know which one I’d rather be adding to my portfolio for 2021.