Is 8x8 Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does 8x8 (NASDAQ: EGHT  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell 8x8's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at 8x8's key statistics:

EGHT Total Return Price Chart

EGHT Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

73.8%

Pass

Improving profit margin

(4.2%)

Fail

Free cash flow growth > Net income growth

335% vs. 66.4%

Pass

Improving EPS

27.5%

Pass

Stock growth (+ 15%) < EPS growth

642% vs. 27.5%

Fail

Source: YCharts. * Period begins at end of Q2 2010.

EGHT Return on Equity Chart

EGHT Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(84.3%)

Fail

Declining debt to equity

No debt

Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Unfortunately, 8x8 doesn't quite knock it out of the park, as it earned only four out of seven passing grades. Over the past three years, return on equity has dipped substantially, despite growing revenue and net income. However, 8x8's shareholders have enjoyed monster growth, which can make it easier to overlook fundamental mediocrity. Can 8x8 continue to deliver superior performance in the future if its fundamentals continue lagging its share price? Let's dig a little deeper to find out.

Recently, 8x8 posted a better-than-expected quarter, which builds on the strength of its subscriber growth -- the company reported 14,260 new subscribers from 2009 to 2013, and its revenues have been growing at an impressive 32% annual clip since 2007. It is evident that 8x8 has continued to leverage more lucrative opportunities across its core communications markets.

Also, 8x8 recently demonstrated a "Cloud-Based Call Center," which will enable small and mid-sized business customers to operate call centers under the popular cloud model -- in essence, customers will host their call center operations on 8x8's hardware. It's not necessarily new, as outsourced call center operations are familiar to anyone who's tried to reach a customer service rep in the last few years; but this move allows businesses with fewer resources to take advantage of the same low-cost services long used by big business.

Fool contributor Dan Caplinger notes that 8x8 has plans to upgrade its call center products by the end of this year. In addition, it is focusing on some technological innovations that will provide high-quality IT services to cost-conscious telecom clients. However, 8X8's competitors MagicJack VocalTec and Vonage (NYSE: VG  ) aren't about to give up ground in cloud-based services. These two companies have already pushed VoIP rates into the floor with brutal competitive efforts, so they've got to find new growth avenues somewhere. Vonage recently developed an app to allow free video calls for smartphone users, and its improved IP-based telephony systems will put it in direct competition with 8x8's cloud-based call center.

Putting the pieces together
Today, 8x8 has many of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 11, 2013, at 8:10 AM, wearable99 wrote:

    nice charts, but doesn't reflect the new 8x8 relationships with other companies...softbank, vmware, cosentry, appian systems or it's treasure trove of voip/cloud patents and patent pendings.

    This company has built it's future over the years with great foresight. It has no debt and makes money. it has only 72million shares outstanding. I like to project a companies intellectual properties and core assets and ask myself how could the partnering company use them to be a better product/company. Beauty is in the eye of the beholder, and in this light 8x8 shines brightly. But the arena 8x8 plays in is still developing and evolving.....voip wasn't even in common vocabulary a few years ago. 'virtual contact center', do we know how you'd use it? smart grid? software defined network/datacenter? I don't think a backward looking chart can really help. It's nice to make you feel better, but doesn't tell the story I want to hear....morover, 8x8's patents will help determine winners and losers. the one time income blip of a year ago was from a one time sale of some'legacy'ip. nice when it happened , but makes for a less attractive chart down the road. On the other hand, look at the company web page for Appian Systems, which recently went with 8x8. They help big enterprises with their businesses. I don't think 8x8 really wants to play in the same sandbox as magic jack or vonage.

    PS if you don't like these charts, go back to the days when companies like 8x8 were being told 'voip' what's that. The internet bubble burst knocked out the start ups and the companies that were their support....no more lucent/cisco took a hit...global crossings/asia global crossing sold/merged/but low and behold not gone. look deeper and it appears their underlying technologies are being used or going to be implemented around the world and 8x8 is ready to play a prominent role going forward.imho

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