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.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.