What Happened:
Shares of business communications software company 8x8 (NYSE:EGHT) fell 10.8% in the morning session after Morgan Stanley analyst Meta Marshall downgraded the stock’s rating from Equal-weight (Hold) to Underweight (Sell) and lowered the price target from $3 to $2, citing a “challenging growth equation.” The new price target represents a potential 8% downside from where shares traded when the downgrade was announced and suggests the analyst expects the stock to underperform in the near term.
The analyst noted that “EGHT’s valuation is below SaaS peers, but re-rating is incumbent on re-accelerating revenues. Expansion into areas like CCaaS should help, but unlikely to drive material upside near term”. In addition, given the unclear top-line catalyst path and weaker margins vs. peers, Marshall expects EGHT to lag in an eventual software recovery. Marshall is largely negative on communications software as a whole and expressed this through additional downgrades of TWLO and BAND.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy 8x8? Access our full analysis report here, it's free.
What is the market telling us:
8x8's shares are very volatile and over the last year have had 44 moves greater than 5%. But moves this big are very rare even for 8x8 and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 4 months ago, when the stock dropped 14% on the news that the company reported third-quarter results, which missed analysts' expectations for key topline metrics, including revenue, ARR (annual recurring revenue) and billings. Free cash flow also declined significantly. Notably, ARR grew only 1% year on year and flat sequentially. The company observed churn mostly within smaller customers.
Management added during the earnings call, "...we have been devoting additional resources to retention of the Fuze enterprise customers and expect to see an acceleration in upgrades to 8x8, but we probably have at least one more quarter before this headwind to ARR growth begins to dissipate."
Looking ahead, it was not surprising that revenue guidance for the next quarter and the full year both missed Wall Street's estimates. A bright spot was a beat on profit that led to a non-GAAP EPS beat. However, underperformance on revenue guidance drove the stock performance. Overall, it was a weak quarter for the company.
8x8 is down 44.3% since the beginning of the year, and at $2.05 per share it is trading 57.5% below its 52-week high of $4.81 from July 2023. Investors who bought $1,000 worth of 8x8's shares 5 years ago would now be looking at an investment worth $82.56.
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