1 Stock Down Big With 27% Upside?

Since the beginning of 2022, tech stocks have taken a beating amid rising interest rates, low consumer confidence and surging inflation. This has led to enormous selloffs and, in some cases, undervalued companies. One such company is 8×8 (NASDAQ:EGHT).

8×8 is a software-as-a-service provider focused on contact center, VOIP, video chat and other communications solutions. The company provides services to mid-size and large businesses, as well as government clients. Through its unified communications platform, 8×8 also functions as a collaboration tool for teams.

In the last reported quarter, 8×8 delivered 24 percent year-over-year revenue growth for a total of $187.4 million in revenues. While the company was still operating at a loss, its losses shrank to $25 million from $37.2 million the previous year. GAAP gross margin increased from 61 percent last year to 67 percent. On a non-GAAP basis, gross margin reached 70 percent.

Despite its losses, 8×8 achieved a significant earnings beat compared to the analyst consensus estimate. While analysts were expecting losses of $0.22 per share, 8×8 lost only $0.16 per share. These results also extended a trend of two previous quarters in which 8×8 handily outperformed earnings estimates.

One of the most promising factors in the most recent earnings report was 8×8’s cash flow. Cash from operating activities reached $13.8 million, up 171 percent from the same quarter in 2021. The company’s cash stockpile did, however, diminish from $145.6 million in Q1 to $132.3 million in Q3.

In addition to growing its revenues and beating earnings, 8×8 is also expanding its geographic footprint. As of the most recent quarterly reporting, the company added Estonia and Lithuania to its service markets, bringing the total number of markets served to 56.

After losing more than 70 percent of its value YTD, 8×8 appears oversold. A discounted cash flow analysis suggests a fair value of $5.72 per share, which aligns closely with the median analyst target price of $5.50. These two projected price targets would give 8×8 an upside of 27% percent and 14.5 percent, respectively at the time of research.

Valuation metrics also suggest that 8×8 is oversold. At 23.95 times earnings, the stock may not appear cheap at first glance. However, analysts expect 8×8 to grow at an annualized rate of nearly 150 percent over the next five years. While this projection may be too optimistic, it leaves ample room for 8×8 to be a good investment at today’s prices.

8×8’s most pressing risk is its debt load. The company carries a debt-to-equity ratio of over 6. At this level, 8×8 could face significant difficulties down the road due to its hefty obligations. Although the company’s cash flows are rapidly improving, 8×8 would look more attractive if it could pay down some of its debts.

8×8 also carries the inherent risks of an unprofitable, high-growth company. Despite achieving narrowly positive earnings in a few quarters from 2016-2018, 8×8 has never reached reliable and sustainable profitability.

Although 8×8’s growth projections are extremely positive, investors should be aware that they are taking on a decent amount of risk when investing in startups that are still losing money.

A final risk factor to consider with 8×8 is the fact that it is operating in a highly competitive industry with relatively low barriers to entry. As such, the company doesn’t have much of a moat around it. Large competitors may be able to snatch up market share more rapidly than 8×8. With that said, the company’s small size and the large pool of potential customers likely leave it with plenty of room to keep growing for the foreseeable future.

Ultimately, 8×8 appears to be a compelling buy from a valuation perspective but commensurate risks accompany it. Thanks to the massive selloff this year, the stock is attractively priced and could appreciate significantly over the next 12 months. Pairing this fact with 8×8’s projected growth, high gross margins and cash flow, the stock could be a lucrative buy for investors looking at the SaaS market who are willing to take on significant risk.

Investors could also see the potential benefits of a buyout in the relatively near future. Analysts have speculated about the possibility of an offer from RingCentral to acquire 8×8. In the event of such a buyout, investors who buy at today’s prices would likely see a decent return on their capital.

For those with a moderate to high risk tolerance who are seeking stable returns, 8×8 could be a solid choice. The company’s valuation relative to its growth prospects and its rapidly improving cash flow both point to the possibility of good returns. While 8×8 does carry a decent amount of risk, it also has the potential to grow quite well for the next several years.