Recent news regarding Voice Over IP technology (VoIP) coming to cell phones has catapulted Vonage (VG) to cult-like status, and the stock enjoyed a boost because of it. Vonage, which
Vonage has become a public proxy for the prospects of VoIP technology. The technology, which enables people to make calls over their Internet connections rather than over phone lines, has been an inexpensive alternative to traditional landline calling.
And in fact, the rise in popularity of VOIP has eaten into the landline profits of large telecommunications companies, like AT&T (T) and Verizon (VZ). Cable companies have been able to flank the big phone companies by providing local and long distance service using VoIP over their cable lines.
VoIP still comes in two flavors.
The first is “free.” Skype, the global VoIP pioneer, which is owned by eBay and is in the process of being spun off by the e-commerce company, has 400 million subscribers. Most of these people use the Skype VoIP product on their PCs with a headset and microphone. It may be unwieldy, but it is free.
The other form of VoIP is paid, but the bills are not very high for consumers. Vonage charges less than $30 a month for its unlimited calling packages. The major cable companies charge about the same.
Now VoIP is coming to the wireless handset. Yesterday, AT&T approved the use of VoIP applications on the Apple (AAPL) iPhone. Google’s Voice application is also trying to get approved for iPhone use, and Apple is not likely to block the product. The FCC has indicated it is in favor of open use of the 3G airwaves without restraints from carriers or handset companies.
Vonage Cashes in On Excitement Over VoIP
The iPhone news has ignited tremendous interest in VoIP, and in Vonage, specifically. The excitement around VoIP has risen to a level that it hasn’t seen since Vonage went public in 2006.
Vonage has an application for the iPhone that will give it access to the millions of people who go to the Apple App store to download software for their handsets. Vonage believes that its advantage is that its application focuses on cutting costs for international calls. It remains to be seen how big that market is.
Vonage traded higher today on news that Citigroup upped its target price for the stock to $1.50 from $1. Unfortunately, Vonage already traded at about $1.50, so the news did not mean much. The hyperactive trading environment on Wall Street managed to push Vonage up 39% to $2. It is worth remembering that the stock was over $2 in August, before quickly falling to $1.35.
Vonage is still faced with the fact that it is an extremely small player in VoIP, with an extremely weak balance sheet and not much of a brand. The company’s revenue is about $220 million a quarter, and it has lost money two of the last four quarters. Vonage has long term debt of $240 million and only $56 million in cash.
Vonage is proof that being an industry pioneer does not make for a stellar balance sheet and does not guarantee success as the industry matures.
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