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The technological convergence that began in the late 1990s continues to show positive side effects in the product and service offerings of today's telecommunication providers. Up until just a few years ago, companies - and small business alike - needed to seek out different vendors to aggregate parts to form a communications solution.

Those times have come and gone, and as single companies now offer a cost-cutting, one-stop solution for product and service provision, it behooves us to look into one of the companies that make this possible. 8x8 (NASDAQ:EGHT) is an Alternative Carrier that is on the forefront of this new market, and its stock is ready to climb.

The host with the most

8x8 is a complete, and scalable, office communication solutions provider. Its main product and service offerings are hosted Voice over Internet Protocol, or VoIP, telephony, virtual office communications, web-based conferencing, and cloud-based computing services.

The market for small and mid-sized business communications solutions has been burgeoning here in the U.S. Nearly 80% of businesses are expected to be using VoIP by the end of 2013, with 49% already doing so. This makes a lot of sense as businesses have much to gain by switching to VoIP, primarily due to its low cost as compared to traditional phone services.

8x8 is the sixth largest Alternative Carrier, according to market capitalization. It has a growing customer base, which has recently topped 35,000 businesses. In March of 2012, Frost and Sullivan issued analysis, which listed 8x8 as the top provider of installed IP telephony lines in North America.

The competition

The company's competitors include Level 3 Communications (NYSE:LVLT) and Vonage (VG). Level 3 is one of the more recognizable brands in the communications world. It has annual revenue of over $6 billion, but has also lost $1.66 in EPS as of last quarter. Its product and service offerings insofar as VoIP telephony are similar to 8x8's, but its main crutch is physical networking and fiber optic connections.

The signs showing that Level 3 will move into profitability have not emerged as of yet. According to analysts consensus estimates, it will still be in the red for another three quarters. Because of this, I would stay away from this stock and look towards a company already showing profitability and growth.

Vonage is another recognizable brand in the VoIP arena. It's a growing force more with home subscribers, but also has been pushing more into the small and mid-sized business market. Vonage currently runs over 2.4 million subscriber lines, which translates into $842 million in revenue as of last quarter.

Following a disastrous IPO in 2006, analysts bet against this company. That is, until Vonage was proven right with its investment into the telephony market. Its foothold with the U.S. consumer is large, and growing. Under new management and a new marketing push, Vonage may be a winner in 2013-2014. My advice is to watch the stock carefully, and buy on pullbacks.

8x8's financial outlook

The last fiscal year, ending March 31, 8x8 had $0.20 in EPS on $107.6 million in revenue. 8x8 has been able to deliver steady revenue growth over the past five years, growing the top-line from $61.6 million in 2008, to where it stands today. Gross profit margins have held steady at around 67.5% over the past few years. With continued marketing and sales initiatives, analysts have been able to ascertain over 17% revenue growth for 2014 and an EPS consensus estimate of $0.27.

A cash generating machine

The company generated over $31 million in cash from operations. Subtracting $5.7 million in capital expenditures and other miscellaneous items, the net change in cash for fiscal 2013 was $27.9 million. This increase is cash from operations is 60% higher than 2012. Compared with Level 3, which had negative cash flow of $138 million, 8x8 shows to be smaller and nimbler when it comes to generating positive free cash flow.

Valuation

8x8 currently trades 32 times forward P/E, which is comparatively cheaper than Level 3's forward P/E multiple of 126. Vonage, on the other hand has been able to be competitive when it comes to valuation attractiveness, but going forward, the outlook for greater velocity in year-over-year earnings goes to 8x8.

Looking back at how 8x8 has traded, the stock hasn't kept pace with the growth it has been experiencing. Additionally, what hasn't been priced into the stock is the expectations for the industry to balloon over the remaining part of this year into next. Historically, the shares have traded right around 27 times EPS, which isn't too far off where it is today, so a market premium hasn't been attached to the price of the shares as of yet.

Conclusion

There is no doubt that the VoIP solutions market is the place to be if you're looking to invest in the communications industry. As it stands, VoIP products and services are a $111 billion business, and 8x8 is rapidly becoming a force to be reckoned with.

Coupled with aggressive growth, attractive valuations, and a recognizable brand, I believe 8x8 will be a great stock to own going into the second half of this year and into next. Also, be on the lookout for 8x8 to be an acquisition target as this company has started to step on the toes of other, traditional phone companies, such as Verizon and AT&T.

Source: 8x8 Is The Host With The Most