Those times have come and gone, and as single companies now offer a cost-cutting, one-stop solution for product and service provision, it behooves us to look into one of the companies that make this possible. 8×8, Inc. (NASDAQ:EGHT) is an Alternative Carrier that is on the forefront of this new market, and its stock is ready to climb.
The host with the most
8×8, Inc. (NASDAQ:EGHT) is a complete, and scalable, office communication solutions provider. Its main product and service offerings are hosted Voice over Internet Protocol, or VoIP, telephony, virtual office communications, web-based conferencing, and cloud-based computing services.
The market for small and mid-sized business communications solutions has been burgeoning here in the U.S. Nearly 80% of businesses are expected to be using VoIP by the end of 2013, with 49% already doing so. This makes a lot of sense as businesses have much to gain by switching to VoIP, primarily due to its low cost as compared to traditional phone services.
8×8, Inc. (NASDAQ:EGHT) is the sixth largest Alternative Carrier, according to market capitalization. It has a growing customer base, which has recently topped 35,000 businesses. In March of 2012, Frost and Sullivan issued analysis, which listed 8×8, Inc. (NASDAQ:EGHT) as the top provider of installed IP telephony lines in North America.
The competition
The company’s competitors include Level 3 Communications, Inc. (NYSE:LVLT) and Vonage Holdings Corp. (NYSE:VG). Level 3 is one of the more recognizable brands in the communications world. It has annual revenue of over $6 billion, but has also lost $1.66 in EPS as of last quarter. Its product and service offerings insofar as VoIP telephony are similar to 8×8, Inc. (NASDAQ:EGHT)’s, but its main crutch is physical networking and fiber optic connections.
The signs showing that Level 3 Communications, Inc. (NYSE:LVLT) will move into profitability have not emerged as of yet. According to analysts consensus estimates, it will still be in the red for another three quarters. Because of this, I would stay away from this stock and look towards a company already showing profitability and growth.
Vonage Holdings Corp. (NYSE:VG) is another recognizable brand in the VoIP arena. It’s a growing force more with home subscribers, but also has been pushing more into the small and mid-sized business market. Vonage Holdings Corp. (NYSE:VG) currently runs over 2.4 million subscriber lines, which translates into $842 million in revenue as of last quarter.
Following a disastrous IPO in 2006, analysts bet against this company. That is, until Vonage was proven right with its investment into the telephony market. Its foothold with the U.S. consumer is large, and growing. Under new management and a new marketing push, Vonage may be a winner in 2013-2014. My advice is to watch the stock carefully, and buy on pullbacks.
8×8’s financial outlook
The last fiscal year, ending March 31, 8×8, Inc. (NASDAQ:EGHT) had $0.20 in EPS on $107.6 million in revenue. 8×8 has been able to deliver steady revenue growth over the past five years, growing the top-line from $61.6 million in 2008 to where it stands today. Gross profit margins has held steady at around 67.5% over the past few years. With continued marketing and sales initiatives, analysts have been able to ascertain over 17% revenue growth for 2014 and an EPS consensus estimate of $0.27.
A cash generating machine
The company generated over $31 million in cash from operations. Subtracting $5.7 million in capital expenditures and other miscellaneous items, the net change in cash for fiscal 2013 was $27.9 million. This increase is cash from operations is 60% higher than 2012. Compared with Level 3 Communications, Inc. (NYSE:LVLT), which had negative cash flow of $138 million, 8×8 shows to be a smaller and nimbler when it comes to generating positive free cash flow.
Valuation
8×8 currently trades 32 times forward P/E, which is comparatively cheaper than Level 3’s forward P/E multiple of 126. Vonage, on the other hand has been able to be competitive when it comes to valuation attractiveness, but going forward, the outlook for greater velocity in year-over-year earnings goes to 8×8.
Looking back at how 8×8, Inc. (NASDAQ:EGHT) has traded, the stock hasn’t kept pace with the growth it has been experiencing. Additionally, what hasn’t been priced into the stock is the expectations for the industry to balloon over the remaining part of this year into next. Historically, the shares have traded right around 27 times EPS, which isn’t too far off where it is today, so a market premium hasn’t been attached to the price of the shares as of yet.
Conclusion
There is no doubt that the VoIP solutions market is the place to be if you’re looking to invest in the communications industry. As it stands, VoIP products and services are a $111 billion business, and 8×8 is rapidly becoming a force to be reckoned with.
Coupled with aggressive growth, attractive valuations, and a recognizable brand, I believe 8×8 will be a great stock to own going into the second half of this year and into next. Also, be on the lookout for 8×8 to be an acquisition target as this company has started to step on the toes of other, traditional phone companies, such as Verizon and AT&T.
The article 8×8 Should Be a Stock You Own originally appeared on Fool.com and is written by Michael Mandala.
Michael Mandala has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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