In April, investors who missed the hyper-growth Zoom (NASDAQ:ZM) train were hoping to play catch-up on the work-from-home trade by buying peer 8×8 (NYSE:EGHT). EGHT stock rose about 60% from early April to early May.
Then the communications technology company reported fourth-quarter earnings that underscored the ugly about 8×8: although revenues rose 30% year-over-year, expenses rose by more and its net loss widened from the year-ago quarter. The stock plunged more than 30% in the days following that ugly print.
I warned about this ugly part of 8×8 in mid-Apirl — when EGHT stock was soaring — saying that ballooning expenses will, for the foreseeable future, offset robust revenue growth and ultimately limit profit growth potential.
I’m doubling down on that claim today.
If the company can figure out its spending problem, 8×8 stock is a multi-bagger over the next few years. But management hasn’t shown that they have figured that problem out. So long as they haven’t, profits will remain muted and EGHT stock will remain depressed.
Huge Revenue Potential
There’s no question about it. 8×8 has huge revenue growth potential over the next decade as a hybrid Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) provider.
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 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.
Zooming out, both the UCaaS and CCaaS markets are positioned for huge growth over the next decade, as workplaces become increasingly virtualized, employees become more mobile than ever, and remote work becomes more normal. In that world, cloud communications tools are integral to the success of the enterprise, and as such, UCaaS and CCaaS solutions will become ubiquitous across enterprises in the 2020s.
8×8 is one of many UCaaS and CCaaS providers out there. But the company has leveraged its hybrid model to sustain market share and 15%-plus revenue growth for the past several years.
The same trend will persist over the next decade. The UCaaS and CCaaS markets will boom, and 8×8 should sustain 15%-plus revenue growth.
Muted Profit Potential
While 8×8’s revenue growth potential over the next decade is huge, the company’s profit growth potential isn’t so big.
That’s because the company is having to spend an arm and a leg on technology, research and marketing to drive big revenue growth. Since 2017, 8×8’s revenues have risen 75% … but expenses have risen 85%, and the company’s net losses have significantly widened.
What gives? Too much competition.
The UCaaS and CCaaS markets are exceptionally crowded. 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, NASDAQ:GOOGL) and RingCentral (NASDAQ:RNG). 8×8’s UCaaS solutions often slot in right behind those three big players. In the CCaaS market, 8×8 is simply a “challenger,” with NICE (NASDAQ:NICE), Five9 (NASDAQ:FIVN), Talkdesk and Genesys widely considered as the market “leaders.”
Broadly, then, 8×8 is 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. If the company can figure out a way to leverage those advantages to drive revenues higher without a significant uptick in spending, then 8×8’s profits could roar higher, and EGHT stock will take off.
But management hasn’t shown an ability to do that yet. Until they do, EGHT stock will be weighed by a lack of profit growth potential.
Bottom Line on EGHT Stock
8×8’s biggest problem is that the company is having to spend to grow, thanks to intense competition in the UCaaS and CCaaS markets. That competition won’t let up anytime soon. As such, 8×8 is going to have do something to figure out how to simultaneously drive positive revenue growth and positive operating leverage.
Once they do, EGHT stock will take off like a rocket ship. Until then, the stock will remain depressed.
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.