Forget Zoom. These stocks are the next wave of cloud communications.

  • By Eric J. Savitz,
  • Barron's
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With much of the world working from home, questions about cable service, home insurance, and e-commerce orders have taken on new importance. And chances are those questions have been fielded by customer-service agents also working from home.

Like so many things, the story starts with the pandemic, which forced companies to adopt a more technologically sophisticated approach to managing customer service; it quickly became impractical to have headset-wearing customer-service reps sitting in the same room.

Related article: Read more about Thematic Investing

As a result, there’s drama emerging in what was once one of the sleepiest corners of the tech landscape: software for running call centers. And therein lies opportunity for investors.

Even before Covid-19, call centers were going through a digital transformation, gradually shifting to a cloud-based, artificial intelligence–driven future and away from hardware systems made by companies such as Cisco Systems (CSCO) and Avaya Holdings (AVYA). Like so much of the cloud’s offerings, these services have a jargony name: “call center as a service,” or CCaaS, pronounced “c-cass.” The story has been unfolding alongside cloud-based phone, video, and messaging services—universal communications as a service, UCaaS, or “u-cass.”

The two segments collided in July, when Zoom Video Communications (ZM) announced a deal to buy the call-center software company Five9 (FIVN) for $14.7 billion in stock. The merger unraveled a few months later because Zoom’s stock had tumbled after the economy’s reopening caused an inevitable slowdown in the videoconferencing business. The two sides failed to reach revised terms, and Five9 holders rejected the deal.

But you can still see the logic. Zoom said the merger would “transform how businesses connect with their customers, building the customer engagement platform of the future.” There are clear synergies in how companies connect with both their workers and customers—and Zoom wants to add the customer piece to its now ubiquitous platform.

Zoom isn’t the only one, and more deals seem likely, especially with the latest numbers showing continued strength in the CCaaS business.

This past week, NICE (NICE), a 35-year-old Israeli call-center company that has been rolling out cloud-based versions of its technology, posted third-quarter revenue of $490 million, up 20% from the figure a year earlier, crushing Wall Street estimates. For the full year, NICE sees revenue up 15%, to nearly $2 billion, its fastest growth since 2017.

NICE might be the largest tech company you’ve never heard of. After an 80% gain over the past 18 months, the company has a stock market value of roughly $20 billion.

NICE CEO Barak Eilam told me this past week that 87% of global spending on call centers goes toward labor. “AI is the big promise, and starting to deliver,” Eilam says.

Eilam estimates there are 15 million customer-service agents around the world, with each one costing employers about $50,000 a year. Even a 10% reduction in the number of agents would create significant savings. Eilam thinks NICE’s cloud business can grow 25% or more for the next three to four years at least.

While the idea of computers replacing humans is sure to raise skepticism, the new AI systems are often an improvement on inefficient call centers and long hold times. I recently called Comcast (CMCSA) about an internet outage, and the system told me that there was an issue in my area, gave me a target time for a fix, and offered to text me when the repair was done—all without me asking a single question.

Eilam says call-center software is evolving to cover a broader set of customer experiences, including digital and offline interactions. Most companies operate call centers and digital channels in separate silos, but artificial intelligence can link them.

“We need to manage your journey through all of these different channels,” Eilam says.

The opportunity goes beyond NICE. Five9 shares spiked 14% last Tuesday. As I wrote last month, Five9 is heading in the same direction as NICE—digitizing and adding AI to its call-center platform.

Five9 posted revenue growth of 38% in its September quarter, bashing Wall Street estimates, just like NICE. Five9’s results were driven by 51% growth in the company’s enterprise business. The company has since picked up a couple of new Buy ratings from the Street.

Five9 executives have quickly moved past the failed Zoom deal and are now raving about an independent future. The company is meeting with analysts this week, and the session could offer a new boost to Five9’s shares, which have fallen below their pre-Zoom deal announcement level.

Both Five9 and NICE offer investors a bet that cloud-based, AI-powered software can slash call-center costs—even as the companies expand into adjacent markets. Another option is RingCentral (RNG), a Covid-era darling whose shares are down 27% this year. The company competes in both call-center and cloud-based telephony. This past week, RingCentral reported 47% sales growth in its latest quarter.

To be sure, none of these stocks are value plays. NICE trades for 10 times estimated 2022 sales, Five9 at 14 times, and RingCentral at 12. But all three are seeing accelerating growth—and all look cheaper than Zoom, which, despite its recent swoon, still fetches roughly 16 times forward sales.

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