Even though 8x8 (currently trading at $1.95 per share) has gained 18.2% over the last six months, it has lagged the S&P 500’s 27.9% return during that period. This was partly due to its softer quarterly results and 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? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think 8x8 Will Underperform?

We don't have much confidence in 8x8. Here are three reasons why EGHT doesn't excite us 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 $185.7 million in Q2, and over the last four quarters, its year-on-year growth averaged 1.2%. 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 8.8% annualized growth for the past five years. This projection is underwhelming and suggests its newer products and services will not lead to better top-line performance yet.

3. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

8x8’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between 8x8’s products and its peers.

Final Judgment

8x8 falls short of our quality standards. With its shares trailing the market in recent months, the stock trades at 0.4× forward price-to-sales (or $1.95 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 suggest looking at the Amazon and PayPal of Latin America.

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