Revenues Working Against 8x8, Inc.'s (NASDAQ:EGHT) Share Price

You may think that with a price-to-sales (or "P/S") ratio of 0.4x 8x8, Inc. (NASDAQ:EGHT) is definitely a stock worth checking out, seeing as almost half of all the Software companies in the United States have P/S ratios greater than 5.3x and even P/S above 14x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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View our latest analysis for 8x8

What Does 8x8's Recent Performance Look Like?

8x8 hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on 8x8 will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For 8x8?

In order to justify its P/S ratio, 8x8 would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 6.0% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.2% as estimated by the six analysts watching the company. Meanwhile, the broader industry is forecast to expand by 21%, which paints a poor picture.

With this information, we are not surprised that 8x8 is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From 8x8's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of 8x8's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

You should always think about risks. Case in point, we've spotted 1 warning sign for 8x8 you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.