Tuesday, June 20, 2006

Is Vonage Oversold?

I think so!

Earlier today, I was speaking with colleague Neal Shact of Communitech Services about this, and his take led me to think along these lines as well. Of course, most evidence points to the contrary, with the following being some bona fide examples.....


What a mess, right? This dollars and sense scenario of their IPO share price falling off a cliff is echoed by a market sentiment scenario, courtesy of TrendIQ.

This is a fascinating take on the market, and I've blogged about them before. If you're interested in tracking the VoIP market (and others like wireless and social networks), you should look into their services.

Check this out below. Look how much of a dip market sentiment towards Vonage has taken. The chart may be hard to read - Vonage is the green line that's all wavy. The black trend line with the boxes is the overall industry average. To me, this is just as telling as Vonage's share price erosion, and may be a better indicator of customer loyalty, which is absolutely critical to Vonage right now.

This chart only shows Vonage and a couple of other VoIP players with "V" names. Don't worry about their trend lines. There are several other charts showing the sentiment for the other providers, but I'm just focusing on Vonage right now. Vonage's trend line has clearly taken a big dip, and it's quickly dropping down to the overall industry average, which isn't good.

Vonage sentiment.gif

And then there's popular opinion. Om Malik put a poll up on his blog asking what's the right price for Vonage's stock. Again, based on how a handful of readers voted, as well as their candid comments, the picture is pretty bleak.

It's very easy to kick someone when they're down, but I say let's look on the bright side, folks - and there IS a bright side (isn't there??). I'm not as bullish as Dan Berninger, but surely, all those subscribers have got to be attractive to someone, especially with the shares being basically half price. I see four things that you'd think would be of value to someone large enough to ride things out:

1. Upwards of 2 million subscribers - no other VoIP pureplay comes close. Sure, they'll lose a small piece of this in the fallout from the IPO, but I don't think it will be a tidal wave - provided they handle it properly, and start doing things right.

2. A healthy revenue base from these subscribers - over $400 million, annualized. Even if prices drop to keep pace with the market, this is a huge revenue stream for a VoIP company.

3. A ton of cash in the bank. It's not clear how much cash they actually raised, or how much they'll keep, pending all this litigation and other headaches, but they certainly haven't had much time to spend it all on advertising.

4. Huge accumulated losses. Wouldn't that be worth something to somebody who pays a lot of corporate tax?

It's hard to see the good when there's so much bad, but c'mon, where would VoIP be without Vonage? In my view, they've single-handedly built mass awareness of VoIP, and the product is good. It's not perfect, but certainly good enough for the mass market.

No doubt Verizon is in payback mode with their recent patent infringement allegations, and all the Tier 1s are doing their part to throw tacks in the road. Except AT&T. They've been quiet on this front, and I'm of two minds here. On one hand, maybe they're going to follow suit with Verizon, and find some way to add to the mix - maybe it's a price cut, or maybe it's another lawsuit. Or...maybe they'll take the high road, and just play by market rules. Perhaps they don't want to be seen as the big, bad AT&T who finally pushes Vonage over the cliff and forever kills any chance for real competition. Besides, don't they need to play nice with the FCC so as not to jeopardize their megadeals with SBC and BellSouth? Maybe they're just going to wait until that passes regulatory muster, at which point nobody can really stop them. So many scenarios, and all are possible.

All I know is that for better or worse, the market owes Vonage some gratitude, at least if you're a fan of VoIP. Does this make Vonage a buy now? I predicted a strong IPO, and look what happened. I'm not going to answer that one, but I suspect that if you even give Vonage half a chance for survival, there's more upside than downside at this point in time. Any takers?

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