Call Options Or Put Options On 8×8 Inc (EGHT)?
8×8 Inc (EGHT) is a leading provider of cloud based communication services. Their Virtual Office replaces traditional onsite communications systems. It allows their customers to make phone calls and send faxes from anywhere they can access the internet.
EGHT currently trades for $7.84 per share. The shares have soared 135% from the 52-week low of $3.33 and is at a 52-week high.
Is this an opportunity to buy call options on EGHT as earnings growth accelerates? Or should you buy put options on EGHT as customer churn eats into revenue growth?
The bulls make a convincing argument…
8×8’s last two quarterly earnings reports lit a fire under the stock price. And for good reason…
They handily beat revenue and earnings estimates in the first fiscal quarter. And last quarter they beat revenue estimates while earnings came in at the high end of expectations.
Put simply, 8×8 is a growth stock in the early stages of a massive expansion.
What’s more, their business is actually benefiting from Hurricane Sandy. You see, the storm surge flooded many buildings and knocked out communications equipment, power, and internet access for many businesses in the path of the storm.
Even if the storm didn’t damage the office itself, many businesses weren’t able to communicate with customers for weeks. The disaster made it abundantly clear just how vulnerable many businesses were with traditional communications equipment.
8×8’s Virtual Office solves these problems. It’s hosted from two secure data centers. One is on the east coast and the other is on the west coast. And customers can use it to make phone calls, check voicemail, and send faxes from anywhere they can access the internet.
The bottom line is 8×8 should have a record quarter due to their existing marketing in addition to the influx of business from businesses that had their communications equipment knocked out by the hurricane. And that should fuel more upside in the stock after they report earnings next week.
But the bears have a compelling case as well…
There’s no denying 8×8’s Virtual Office is making headway in the market. But after nearly doubling in price over the last six months, the stock has simply come too far too fast.
At this point, EGHT will need to post impossibly high revenue, earnings, and long-term growth projections to continue its recent run after they report earnings next week.
In order for them to achieve these levels, they have to increase prices.
Unfortunately, their target customer is small businesses. And they’re very sensitive to price changes. The reality is the aspect of 8×8’s business model that makes it so attractive is also its weakness.
Let me explain….
Their Virtual Office is provided as a monthly service with little out of pocket expense for the customer. It’s easy and inexpensive for a small business to set up a professional sounding phone service with them. But the simplicity and lack of upfront expense also makes it easy for customers to switch providers.
If they start raising prices, we could see more customers head for the exits. It could derail the growth many investors and analysts are counting on. And lead to a sharp correction in the share price.
If you think the bulls are right, take a look at buying the EGHT February 2013 $7.50 calls for around $0.60.
If you think the bears are right, take a look at buying the EGHT February 2013 $7.50 puts for around $0.40.
Good Investing,
Corey Williams
Category: Options Trading
