Stock of the Day
|
Vonage (VG)
Vonage Trims Loss but Optimism May be Short-Lived
Vonage, the embattled phone company that spent most of last year in the limelight due to its legal troubles, actually reported some positive news this morning as it announced that its quarterly loss substantially trimmed this quarter, even outpacing analyst expectations. Revenue grew close to 19% too. The stock is up about 7% over the last two trading sessions. So there does seem to be some optimism surrounding the voice over internet protocol (VoIP) company now that the endless barrage of patent infringement lawsuits has ended. But is this optimism temporary or has the tide turned in Vonage's favor permanently?
|
| Daily Chart |
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
|
| Stock Analysis |
Vonage's IPO was heavily publicized when it came out in May 2006. But it has been a southward ride for the stock since them. The IPO was priced at $17 and currently the stock trades at $2.11 (and that is including the pop from the last couple of days). The laundry list of items which cause most people to severely doubt the long-term prospects of the company include the numerous patent disputes Vonage has had with the bigwigs in the industry such as Verizon (VZ: Charts, News, Offers) and AT&T (T: Charts, News, Offers) and the substantial payouts that Vonage has had to make to quell these disputes (there are no major legal issues outstanding right now but shareholders always run the risk that a new one will pop-up anytime), the free-flowing red ink on the company's financials (Vonage is yet to report a profit) and most importantly, the lack of a compelling, unique product. Vonage may have been one of the pioneers in the VoIP field but the barriers to entry are low for big telecommunications and cable companies and hence, there is a spate of competitors, a number of which have deeper pockets than Vonage. For example, Comcast (CMCSA: Charts, News, Offers) has the largest VoIP subscriber base in the nation, exceeding that of Vonage. Plus, there is also Skype, a competing service which offers a lot of what Vonage does, except for free.
|
Buy Vonage for just $4
|
Vonage has also had business strategy problems, one of its biggest mistakes being that it overpaid for subscribers by running a lavish national marketing campaign that cost too much and produced too little. But as the Q4 results released today indicate, Vonage has managed to get a hold on some of these issues. It cut back its marketing budget to $63 million from $96 million a year ago and spent the reduced budget more wisely by targeting its ads to customers most likely to be interested in the service. That resulted in a substantial 27% drop in acquisition cost per customer (which fell from $306 to $223). These items had a big say in cutting the net loss to $11.1 million (about 7 cents a share) from $117.1 million a year earlier. Analysts were expecting Vonage to lose 10 cents a share so the Holmdel, NJ based company beat that figure by 3 cents.
|
So while the company is executing better, there are still plenty of reasons to take pause before investing in Vonage. One of them is the churn rate (i.e. the percentage of subscribers Vonage loses each quarter) which stayed still this quarter at uncomfortably high rate of 3%. Vonage has also failed to increase the average amount it makes from each customer (i.e. average revenue per user) substantially either. So while Vonage may make some progress over the next couple of quarters in cutting its marketing budget further, eventually it is going to run out of room to cut. And then the only way to grow its bottom line would be by adding new customers, which is something Vonage has been unable to do at a high level on a cost effective basis. So the only thing that might be attractive about the stock is the possibility of a buyout. Vonage does have 2.6 million subscribers which somebody might else might pay decent money to acquire.
|
Special Offer
|
| Buy VG for just $4
|
Profile |
Click here to view a detailed profile of Vonage.
|
|
|
|
|
Back to newsletter list
