Palo Alto-based Sylebra Capital, led by Dan Gibson, has recently made a transition from a passive (13G) to an active (13D) investor status in 8×8 Inc (US:EGHT), propelling the company’s shares to surge by an impressive 12.6% during Friday’s trading session.

Sylebra’s filing of a Schedule 13D signifies a shift in its intentions, signaling the firm’s preparedness to actively engage with the company and potentially push for transformative changes. The investment manager in the filing disclosed the ownership of 14.39 million shares, equating to a 12.37% ownership in the company.

EGHT stock has struggled to stay above $4.00 a share for most of the year-to-date, save for a spike to $6.38 in early February and a decline to a five-year low of $2.50 earlier this month.

Activism Impacts

Discussions are expected to encompass various aspects, ranging from operations and governance to financial conditions and strategic plans. This development has drawn considerable attention, prompting speculation about the positive impact the activism might have on 8×8’s future trajectory.

Regardless of the outcome from the filing last week, the event would come as a sigh of relief for investors that have seen shares plummet around 90% from heights reached during the pandemic by early 2021.

While Sylebra Capital’s decision to take an active role in 8×8 may be seen as a bullish move, it’s worth noting that the company’s financial performance has already exhibited significant improvements.

Short Squeeze potential

Research from the Fintel platform highlighted the stock’s above-average Short Squeeze Score of 75.14. While the score is not the highest, it does rank 8×8 in the top 16% out of 4,612 screened securities for the possibilities that a short squeeze would occur.

There are currently 16 million shares in the stock shorted, according to the NYSE, equating to around 19% of the total float. These shares have 8.58 days to cover and the Fintel platform has highlighted growing borrow fee rates from 0.45% to 0.56% in the last two weeks as well a declining availability of shares for shorting purposes.

These factors could play part in the possibility of a squeeze.

As Sylebra Capital assumes an active role in 8×8, the stage is set for potentially transformative changes within the company. While the financials reflect positive developments, market participants are eager to witness the impact of Sylebra’s activism and whether it can unlock untapped value for 8×8 and its stakeholders.

We expect more information in the next two weeks as 8×8 management makes the rounds of industry conferences.

Improving Fundamentals

Notably, net losses have diminished, indicating a promising correlation between revenue growth and operating profits. A chart from Fintel’s financial metrics and ratios page for EGHT shows the growth in sales and narrowing net losses over the last five years.

Despite these positive trends, the stock has been trading at historically low levels, which has caught the attention of savvy investors who adhere to the adage of being greedy when others are fearful. In light of this, some market participants are taking a small, speculative position in the stock, recognizing the potential upside while acknowledging the inherent uncertainties of the market.

Examining 8×8’s financial results for the fourth quarter of FY23 provides further insight into the company’s trajectory. Total revenue witnessed a 2% year-over-year increase, reaching $184.5 million, although this included $26.9 million of sales from 2022’s Fuze acquisition. The figure was towards the bottom end of the narrow $184 to $187 million guidance range.

Improving Cash Flows

The company reported that it generated positive operating cash flows of $14 million for the quarter and $49 million over the year.

Positive cash flow generation from operating activities has grown over the last five years. While financing costs have increased, this has been offset by a reduction of investment spending.

Non-GAAP underlying operating profit similarly witnessed an upward trajectory, reaching $24.8 million, or 13.5% of revenue, compared to $4.2 million, or 2.3% of revenue last year.

At the bottom line, non-GAAP net income grew from $5.6 million in 2022 to $12.7 million in the final quarter of 2023 or 11 cents per share. The EPS figure beat consensus expectations of around 9 cents per share.

The positive operating trends exhibited drove an inflection point in shares from its annual low point of $2.50 per share leading into the release. Up until the activist filing, shares had already staged a 40% recovery from the annual low point.

Analysts Weigh In

Needham analyst Ryan Koontz thinks the growth in operating margins to 13.5% by the fourth quarter soothes concerns they and the Street had regarding debt. Koontz said that while the FY24 revenue guidance provided was slightly below consensus expectations, he was positive on the view that operating margins should be sustained.

Needham reportedly hosted a virtual chat with EGHT’s CEO and CFO discussing several topics but highlighted management’s efforts to improve profitability, continue paying down debt with a disciplined focus and to transition to better investments that can drive higher top-line growth.

The firm maintained its bullish ‘buy’ call on the stock and $7 target price.

Fintel’s consensus target price of $5.94 suggests analysts on the Street think the stock could rise 60% over the next year, recovering the declines incurred so far in 2023.

This article originally appeared on Fintel

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