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8×8 (NASDAQ:EGT) share price fell by approx. 7% Before the bell on Friday, Morgan Stanley downgraded the stock to “underweight” from “equal weight,” noting that the growth equation still faces challenges.
The firm also lowered its price target on 8×8 stock, which provides voice, video, chat, contact center and enterprise services, to $2 from $3 Application Programming Interface (API), software solution.
Analysts led by Meta Marshall note that the company’s valuation is lower than that of its SaaS peers, but 8×8 would need to demonstrate a return to growth and more meaningful profitability before it can be re-rated. The company’s operating and free cash flow (FCF) margins are also lower than those of messaging software peers, which also limits re-rating potential.
Analysts added that expansion into areas such as contact center as a service (CCaaS) should help but are unlikely to drive real gains in the short term. With an unclear revenue catalyst path and weaker margins than peers, they expect EGHT to lag in the eventual software recovery.
Marshall and her team said that despite the stock’s large relative valuation discount to SaaS peers, they downgraded the stock to “underweight” because they don’t see any catalysts that could make sense in the near term. significantly changing the pricing and competitive narrative for Unified Communications as a Service (UCaaS).
This is relative underweight as sentiment in the broader software market is weak, and analysts believe investors will remain cautious about 8×8’s growth and look for other ways to eventually reverse sentiment.
In particular, they believe the most important driver for the re-rating is a durable re-acceleration of top-line growth, which they believe will be challenging in the near term due to the long-term dynamics of core UCaaS and the limited ability of new products to effectively offset the given ramp time In particular, other UCaaS peers such as Zoom Video Communications (ZM) and RingCentral (RNG), and more recently Microsoft (MSFT), are looking to make similar expansions into CCaaS.
Analysts also believe that upside in operating margins and free cash flow will not support a re-rating given the lag relative to communications software and UCaaS peers.
Analysts note that while they continue to view the refinancing of the 2027 term loan at a more attractive rate (currently around 12%) as a near-term upside risk/catalyst, they believe this has the ability to drive growth due to concerns over revenue and Meaningful and sustainable re-ratings are constrained by broader concerns about margins.
Marshall and her team added that they may err on the side of caution if 8×8’s new product growth exceeds expectations, if the company is able to close the profitability gap with its peers, or if consolidation in the space becomes a reality.
8×8’s (EGHT) has a Sell rating in Seeking Alpha’s Quantitative Ratings system, which consistently outperforms the market. Meanwhile, the average rating from Wall Street analysts is a more positive “buy.”
