8x8 Could Offer a Quick Double-Digit Return

By now, "the cloud" -- the space where data is electronically stored in the ether -- is old news. Less known, however, and potentially far more profitable for traders, is a trend emerging from cloud computing called "unified communications."

Unified communications can be thought of as a technological system that integrates several communication tools -- such as phone, video conferencing and instant messaging services -- into a single, easy to access and use service. When integrated into the cloud, the system allows anyone, anywhere to securely access data through a computer or smartphone, without the need for multiple machines or apps.

The unified communications industry is growing rapidly. A recent study by research firm Frost & Sullivan concluded unified communications will be a $1.9 billion industry in 2012, up about 16% from 2011.

One of the best-known publically traded unified communications companies is 8x8 (NASDAQ: EGHT), a large Voice over Internet Protocol (VoIP) provider in the United States. The company offers its customers unified voice, video and mobile communications solutions, from voicemail and call center services to virtual offices with all data stored in the cloud. 8x8 occupies a defined market niche, catering to small- and medium-sized enterprises, while leaving larger companies to tech giants like Cisco (NASDAQ: CSCO).

Recently, Gartner, a leading IT research firm, ranked 8x8 as a North American market leader. In the past several months, 8x8 has added thousands of new subscribers and now serves more than 30,000 businesses. As the need increases for small-scale businesses to have teleconferencing and virtual communications solutions, 8x8 should continue to grow.

From a technical perspective, the stock looks strong.

Since the stock's May 2010 low of $1.09, shares have been in a major uptrend, up almost 600%. The stock recently hit a multi-year high of $7.58, and the technicals point to further price appreciation ahead.

In July 2012, the stock popped nearly 25% in a week. Continuing higher from there, an accelerated uptrend line formed. In September, shares hit a high of $7.02, but encountered resistance. Soon after, the stock fell to a low near $5.73, which acted as support.

This initial trading activity marked the beginning of a "W" shaped technical formation, which if it were at the bottom of the formation, would look suspiciously like an inverse head-and-shoulders.

Surging off support in early October, the stock quickly rose to $7.02 resistance, which it unsuccessfully tested twice before falling again to $5.73 support by late October. In early-November, the stock rose off $5.73 support and quickly climbed to $7.02 resistance.

In early December, resistance at $7.02 was finally broken. During the Dec. 17 trading week, the stock hit a multi-year high of $7.58. This shortened holiday trading week, shares held near this level albeit on lower than normal trading volume.

According to the measuring principle for the small "W" shaped basing pattern -- calculated by adding the height of the pattern to the breakout level -- the stock could potentially reach a new high of $8.31 ($7.02-$5.73 = $1.29; $7.02+$1.29 = $8.31). At current levels, this target represents 14% potential returns.

This bullish technical outlook is supported by strong fundamentals. With a surge of new customers adding paid services, analysts project fiscal first-quarter 2013 (ending Dec. 31) revenue will rise 17% to $27.3 million, from $23.3 million, in the comparable year-ago quarter. For the full fiscal 2013 year, the seven analysts following the company expect that an increase in new customers will cause revenue to rise 25% to $107.2 million, from $85.8 million last year.

The earnings outlook is similarly positive. Driven by an increase in new customers for the upcoming fiscal third-quarter, analysts project earnings will rise to $0.05, from $0.04 in the same period a year-ago. For the full fiscal 2013 year, analysts expect increased demand for VoIP services will cause earnings to nearly double, reaching $0.20, from $0.11 last year.

In addition to a strong fundamental outlook, the company is in a cash-solid position with $40.1 million in available cash and no long-term debt.

Risks to consider: Because the unified communications sphere is lucrative, it is also becoming increasingly competitive. Well-established companies, like AT&T (NYSE: T), Sprint (NYSE: S) and Verizon (NYSE: VZ) have all begun offering competing voice communication services. However, these companies charge extra for messaging and web conferencing options. In contrast, 8x8 offers its customers one low-cost, all-inclusive price for its complete host of services. This low-cost strategy should continue to retain and draw customers, helping the stock stay strong.