Novice Investing - 8x8 = what?

Date: Thursday 20th 2008f November 2008 04:27:01 PM

8x8 = what? - 12/12/2005

By: Novice Investing Staff

On Monday morning, shares of Voice over IP provider, 8X8 Inc. (EGHT) soars after inking a deal with Bellsouth Corp (BLS). The deal is deemed important as eBay's acquisition of Skype has altered the telecommunication's landscape. Skype is not planning to charge a fee for letting users use its service.

What? How can they make money? We are afraid that is the $ 64,000 question. For eBay, it looks like it is using Skype as a loss leader, meaning: it gives away Skype's service for free while making it up on other things. Meanwhile, investors interpret the BellSouth deal as a good one judging by the rise in 8X8 stock price. EGHT rose between 55 to 94 % at midday.

That makes sense. Before the deal, EGHT is expected to lose $ 0.37 for fiscal year ending on March 2006. Meanwhile, EGHT 'only' has positive net cash of $ 0.35 on its latest balance sheet. Without the deal, analysts expect the company to lose another $ 0.41 for the next fiscal year. This depletes the firm's cash and analysts question its ability to survive on its own. With eBay not planning to charge a fee for using Skype, this bankruptcy concern is valid.

The BellSouth deal is a good first step direction. However, it is not certain how much additional revenue EGHT would benefits. We find it hard for EGHT to stand on its own. Current investors better hope EGHT would be bought a few short years from now. Main competitors seem to be hinting towards giving out VOIP service for free. For example, the acquisition of AT & T, which provides VOIP service, might provide its acquirer (SBC Communications) with means to bundle this service for free.

Investing in this sector is risky yet rewarding. If the remaining survivors get bought by bigger competitors, investors will be richly rewarded. However, those that do not get bought and survive on its own, will have to face declining market share and stock price.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding 8X8 Inc. (EGHT) or any other securities.

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