Keep Your Eyes Open for the Vonage Getaway Car (VG)

| About: Vonage Holdings (VG)

The Stalwart submits: While usually staid and reserved here at The Stalwart, and mostly hesitant to make straight stock calls, we have a feeling that the Vonage IPO (NYSE:VG) could be a telltale short. As a shameless self-promotion, here's a snippet from our other contributing author, but at Dealbreaker:

The market is bracing for the IPO of Vonage, the first good old-fashioned unprofitable tech and consumer giant we've had in years. Like Google, lots of people including the non tech-savvy have heard of them. Unlike Google, they're not pulling in mountains of cash. If there's a parallel from the .com years, perhaps it was the IPO of Louis Borders' WebVan, which promised to delivery the groceries. Eventually, some companies have fulfilled its vision, but at the time the company had spent too much on distribution centers around the country, without much hope of profitability. Now with all of the cable and telecom giants offering cheap IP phone calls, not too mention free phone calls from more exotic offerings like Skype, Vonage faces the same profitability questions.

These weak fundamentals might be one reason why the company had to offer shares to its own subscribers. Also, as price is everything, this Stalwart will go on to add that the company looks like it will actually fetch the top end of its range since demand for shares is strong:

Vonage is multiple times oversubscribed and will likely price at the top end of its $16-$18 price range, IPO tracking firm said.

Thus we have strong demand for what looks to be a weak stock, with demand partially stimulated by an offering which was extended to Vonage telephone customers, who we bet aren't exactly the smart money. (And to think that we had to go through extensive registration for access to the Google IPO, as retail investors with existing accounts, and that was risky? What about Vonage selling shares in its yet to be profitable business to its simple customers? Oh wait, Vonage is paying Wall Street its full fees so no problems.)

Plus we have the potential for weak corporate governance:

Vonage founder Jeffrey A. Citron stepped down as CEO in February, when Vonage named Mike Snyder, an executive in the ADT business of Tyco, to the post. ...

He once paid $22.5 million in civil penalties as part of one of the largest fines ever collected by the Securities and Exchange Commission against individuals, according to regulatory filings by the Internet phone company.

Citron also agreed to accept an SEC order that permanently bars him from association with any securities broker or dealer.

The 2003 settlement came after an SEC probe of online trading firm Datek. Citron settled theses charges without admitting or denying the allegations in the SEC's complaint.

The SEC alleged that Datek Securities, Citron and other individuals participated in "an extensive fraudulent scheme" involving improper use of the Nasdaq Stock Market's Small Order Execution System from 1993 to 1998 to make tens of millions of dollars in illegal profits.

Thus from this Stalwart's perspective, it looks like this IPO could be a decent short for those who are inclined to do such a thing. While of course we can roll the dice as to where stock sentiment will be at first, but just imagine what would happen if Vonage customers/ shareholders start losing money in the stock. Vonage might lose both a shareholder and a customer in one go! Beyond that, people might start realizing that the company won't make much, if any, money due to cheap or free similar services online. There's just a lot which can go wrong, and a tough uphill battle for things to go right.

...when the stock begins trading, listen for the screeching tires as Vonage's private equity partners make the get away.

Additional recent articles on Vonage (VG) include:

  • Kevin Chou on The Worst Tech IPO Since
  • John Ogg and Evelyn Rubin's quick previews of the IPO
  • The Stalwart on Vonage IPO Gets Uglier and Uglier
  • Himanshu Pandya on Skype's threat to Vonage
  • Andrew Schmitt on Vonage IPO, Grassroots Desperation
  • All Vonage coverage on SeekingAlpha
  • Check out additional IPO coverage on SeekingAlpha's IPO Analysis page.