Vonage's Surprise: Investors Are Much Smarter in Internet Boom 2.0 (VG)

Jun. 5.06 | About: Vonage Holdings (VG)

By Carl Howe

Saturday, both The New York Times and The Wall Street Journal (sub. req.) bemoaned the disappointing performance of Vonage's (NYSE:VG) public offering this week. With Vonage's shares losing a third of their value in just a week, both publications are wringing their hands, asking what has gone wrong and whether this IPO indicates that something is wrong in today's market.

I allocated the vast resources of Blackfriars Communications to researching this question, and after billions of nanoseconds of research, I uncovered the real reason that Vonage's stock dropped in price:

There were more sellers than buyers for the stock.

Why? Because the fundamentals of this company just aren't very good.

We predicted that this IPO was going to go badly back in February when it was announced. At that time I noted that demand for the stock was going to be poor because the company has no profits, no differentiation, and no strategy for changing its operation so there would be profits.

Yet for some reason, investment banks and research analysts who took part in the offering seemed to think that somehow, somewhere, there would be greater fools than they to snap up the shares. Guess what: they were wrong.

The Vonage IPO was a liquidity event, pure and simple, for early shareholders who had little likelihood of getting their money back any other way. The only problem was that investors are a lot smarter about IPOs in this Internet boom than they were in 1999. Investors today want proof of profits, marketing, and strategy to earn their investment dollars. Vonage didn't have any of those, so everyone wanted to sell the stock rather than buy it, and the stock sank.

I'm not surprised that the stock fell to $12 a share; I'm more surprised that it hasn't sunk further, and I fully expect it will.

Journalists shouldn't be asking what the market did wrong in the Vonage IPO; the interesting story is what the market did right?

VG 10-day chart:

Vonage 10-day chart

Full disclosure: I hold no positions in telecom, Internet, or VOIP stocks.