The Vonage (VG) Mirage

Shares of Vonage (VG) decreased from their peak price of the day yesterday as investors raised concerns about the company’s rapid stock valuation increase. Vonage traded as high as $2.63 before closing at $2.17.  Nonetheless, that is still a stunning increase from the $.45 where it traded last Friday. Vonage”s volume was more than 81 million, about seventy times its normal daily level.

Investors who still believe the stock is cheap base their argument on a recent announcement that Vonage “dramatically improves the value of its core offering.”Vonage World” provides unlimited calling around the world to more than 60 countries, including India, Mexico and China for the current flat monthly rate of $24.99. The new and improved service should, shareholders reason, rapidly increase the VoIP pioneer’s subscriber base, a base which is no longer growing. The flaw in this reasoning is that the announcement was made on August 20, well before the shares began their run.

The alternative theory about the share price was advanced more recently. According to Reuters, “Vanessa Alvarez, analyst at Frost & Sullivan, said news of Google Inc.’s new (GOOG) voice application may be renewing interest in VoIP, or voice-over-Internet Protocol, a technology that Vonage pioneered.” The Google product is free to users, as is the industry leader, Skype, the product of the VoIP division of eBay (EBAY).

A renewed interest in VoIP does Vonage very little good if the new consumers gravitate to free products. Vonage could actually lose customers if the trend is to use a new product from Google that costs the subscriber nothing.
Paid VoIP services are no longer dominated by Vonage. Cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC) began to offer the voice products over their broadband cable systems several years ago, and their success has nearly put Vonage out of business. Vonage may actually be forced out of the industry if it is caught between a free product from a company as large as Google and paid products from the largest cable firms in the country.

Vonage is already shrinking. In the last quarter, the company lost 89,000 net subscriber lines, finishing the quarter with 2.5 million lines in service. Revenue dropped 3% to $220 million, and Vonage had a net loss of more than 12 million. Vonage has only $56 million in cash against $203 million in debt, net of discounts.

The idea that the success of Google Voice will help Vonage is absurd. People are not likely to pay $24.99 per month for something that they can get for free.

Douglas A. McIntyre