Some people think 8×8 (NYSE:EGHT) could be the sleeper stock right below videoconferencing stock Zoom (NASDAQ:ZM), but EGHT stock has some underlying weaknesses.
As Wall Street’s favorite coronavirus play, as investors have piled into ZM stock on the idea that work-from-home orders will create explosive demand for the company’s enterprise video conferencing software.
But, 8×8 is a lesser-known company that offers similar video conferencing services and much more. While ZM stock has surged, EGHT stock has tumbled alongside the rest of the market.
As of this writing, EGHT stock is more than 20% off recent highs.
Does that make EGHT stock a great buy? After all, won’t demand for its products skyrocket, too? And when it does, won’t EGHT stock start acting like ZM stock?
Not necessarily. Zooming out, the big picture on 8×8 is that the company has some good, some bad, and some ugly. Put together, the bull thesis on EGHT stock simply isn’t that compelling.
The Good
The good about 8×8 is that the company is a key player in the overlap of the Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) market, with robust long-term revenue growth potential.
The UCaaS market essentially comprises cloud-hosted services that enable unified enterprise communication, through messages, phone, and video. 8×8 offers those services through its X Series platform.
Meanwhile, the CCaaS market essentially comprises cloud-hosted services that enable customer service organizations to manage multichannel customer interactions. In that market, 8×8 is a key player with its 8×8 Contact Center solution.
Both the UCaaS and CCaaS markets are expected to grow at a double-digit pace over the next several years, powered by the continued digitization of enterprise workflows, the migration to cloud-hosted services, and the automation of enterprise tasks. 8×8 has, so far, grown alongside the market, posting 15%-plus revenue growth in each of the past few years.
Assuming this continues going forward, then 8×8 seems to have a visible trajectory towards sustained double-digit revenue growth for a lot longer.
The Bad
The bad about 8×8 is that the UCaaS and CCaaS markets are exceptionally crowded, and 8×8 isn’t the top dog in either industry.
In the UCaaS market, 8×8’s products compete with offerings from Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG), RingCentral (NASDAQ:RNG), and many, many more. Microsoft, Alphabet, and RingCentral are broadly considered the top players in the market. 8×8 slots in right behind them.
Meanwhile, a similar story unfolds in the CCaaS market. According to Gartner, 8×8 is simply a “challenger” in this market, with NICE (NASDAQ:NICE), Five9 (NASDAQ:FIVN), Talkdesk, and Genesys categorized as the “leaders.”
Broadly, then, 8×8 is widely considered to be a second-tier option in both the UCaaS and CCaaS markets.
Granted, the company is unique in that it can offer unified UCaaS and CCaaS services. The company also has a strong niche in the small-to-medium-sized business vertical. However, once that vertical is fully saturated, it may be tough for 8×8 to sustain robust growth in the face of bigger competition.
The Ugly
The ugly about 8×8 is that the company’s margin profile isn’t terribly strong, and the company has a profitability problem.
For various reasons, gross margins at 8×8 have been declining for several years. A few years ago, they were close to 80%. This year, it looks like they may come in below 60%.
At the same time, because of stiff competition in the UCaaS and CCaaS markets, 8×8 has been forced to spend big to fuel growth. Operating expenses have consequently been soaring, and the opex rate has been climbing higher.
Connect the dots. Falling gross margins. Rising opex rates. That should equal big profit margin pressures, no? Exactly. 8×8 has gone from marginally profitable a few years ago, to reporting net losses today. According to consensus estimates, analysts don’t expect the company to return to the black anytime soon, either.
Without profits or a clear pathway to profitability, 8×8 is a risky bet, even if the company does sustain huge revenue growth.
Bottom Line on EGHT Stock
8×8 might seem like a coronavirus winner… but that’s not the whole story here. In truth, 8×8 is in the right markets, but the company isn’t distinguishable in those markets, and persistent margin headwinds cloud the profitability outlook.
So long as that remains true, EGHT stock will remain a tough buy.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long MSFT.
