Shareholders of 8x8 would probably like to forget the past six months even happened. The stock dropped 24% and now trades at $1.73. This might have investors contemplating their next move.
Is now the time to buy 8x8, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think 8x8 Will Underperform?
Even though the stock has become cheaper, we're swiping left on 8x8 for now. Here are three reasons there are better opportunities than EGHT and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
8x8’s billings came in at $178.1 million in Q4, and over the last four quarters, its year-on-year growth averaged 2.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect 8x8’s revenue to stall, close to its 7.4% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, 8x8’s operating margin rose by 2.1 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 2.2%.
Final Judgment
8x8 falls short of our quality standards. After the recent drawdown, the stock trades at 0.3× forward price-to-sales (or $1.73 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of 8x8
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