Vonage Holdings Corporation (VG) has not been left out when it comes to seeing a wild market ride this year. The difference between Vonage and the broad market is that this was a penny stock for most of the ride. There is an earnings story here, but what really needs to be considered is the future with today’s metrics and how investors might mentally classify this stock.
At the end of 2008, Vonage was a 66-cent stock. By the end of the March 9, 2009 close, the date which traders and investors agree upon as the last day the market saw “every day down, and down big,” Vonage had fallen down to 38 cents. Yet despite a huge rally in the market from the March 9 date, Vonage was still in the 40- and 30-cent range, even in August.
Why This Failed IPO Penny Stock Is Set to Double
But Vonage made two key launches that got its stock moving again. In August, it launched the “Vonage World” service, giving customers unlimited calling around the world to more than 60 countries for the flat monthly rate of $24.99. Suddenly, its could bring in first generation and immigrant clients whose families were in China, India, Mexico, and 57 other countries. Then came word that Vonage was joining in the hype with many others by addressing the iPhone with an iPhone App launch of its own. Suddenly Vonage was a $2 stock before Labor Day.
It turns out that Isaac Newton was correct… “what goes up must come down.” And down it came. To make matters worse, the share price rise actually worked against the net GAAP earnings results, as much of the company’s loss was attributed to a $63 million charge tied to a sharp rise in its share price during the quarter. A conversion feature in some of its convertible bonds increased in value after the stock went from $0.38 to $1.39 at September 30, 2009.
Is that irony or a paradox?
If you took out the GAAP charges, Vonage made $4.6 million or 3 cents per share, but revenue was down 2% to $221.5 million, despite a rise in revenue per user to $29.89 (up from $28.75 a year before). It turns out that the “Vonage World” service worked, as it brought in more new subscriptions in the second half of the September quarter.
The net subscriber count was right at 2.4 million, but the loss was 50,000 subscribers from the sequential quarter before and a drop of close to 200,000 from a year earlier. And customers either not paying or paying late increased its churn rate to 3.4%. The subscriber line acquisition cost was $301, up from $272 a year ago, and down from $363 on a sequential quarterly metric.
Generally investors in small cap stocks want either subscriber growth or revenue growth, or at a minimum, they want a solid balance sheet.
Vonage can blame the recession, and it did, but the problem is that Vonage should be a beneficiary of the recession by some counts. Choosing VoIP is a choice that nobody ever makes because they like the sound better than the old Ma-Bell copper line telephone. This is done either for the convenience of being able to make the call from any PC, or more likely, because of the cost savings. The notion that the customer base is shrinking, even while the company offers savings is a scary one for investors.
And the other issue is that the company has a very limited breathing cushion. Its cash and cash equivalents were listed as $38 million, and restricted cash was unchanged at $40 million. Vonage may claim that it expects to generate positive cash flows in Q4 and in 2009, but common shareholders are very far down the line here. Because of debt conversions, there were 40 million more shares outstanding from a quarter before, with a total of 197 million shares outstanding. So you can take the $205 million market cap listed on public sites or you can take a more diluted figure and calculate a $256+ million market cap.
Either way, it seems that investors have taken a glass half-empty approach here. If the economy starts to soften again, or if the consumer looks to cut back again after the holidays, Vonage could easily be back at risk of being a penny stock again.
Related Articles:
Learn how to leverage the power of technical analysis to identify the short window when a trade is set to go straight up or down. Download your FREE copy of The Trader’s Guide to Technical Analysis here!!
