8×8 Inc. (EGHT) – Closing Short Position – up 87% vs. S&P up 107%
We made 8×8 (EGHT: $25/share) a Danger Zone pick on August 15, 2016. At the time of the report, EGHT earned an Unattractive rating. Our thesis pointed out that the firm’s revenue growth masked its dwindling profits, lagging profitability created competitive disadvantages, and the stock traded significantly above any level justified by the fundamentals of the firm.
This report, along with all of our research, leverages our more reliable fundamental data to get the truth about earnings, as shown in the Journal of Financial Economics paper, “Core Earnings: New Data and Evidence.”
During the 5+ year holding period, EGHT outperformed as a short position, rising 87% compared to a 107% gain for the S&P 500.
Our thesis has largely played out as we expected. 8x8’s return on invested capital (ROIC) fell from -2% in 2016 to -21% TTM, while Core Earnings fell from -$4 million to -$146 million over the same time. However, the firm’s revenue has more than doubled during that time, which has helped push shares higher.
With shares falling over 30% from early 2021 highs, we believe this stock no longer presents the same risk/reward, despite still earning an Unattractive rating. Given its position in a rapidly growing industry, along with cheap money in the current market, the stupid money risk is high. As a result, we’re closing this short position.
Figure 1: EGHT vs. S&P 500 – Price Return – Successful Danger Zone
Sources: New Constructs, LLC and company filings
Note: Gain/Decline performance analysis excludes transaction costs and dividends.
This article originally published on September 2, 2021.
Disclosure: David Trainer, Kyle Guske II, and Alex Sword receive no compensation to write about any specific stock, style, or theme.
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