Why Is Vonage Up 500% in 5 days?

As I begin this, Vonage (VG) is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron's tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn't responsible for the majority of yesterday's move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can't be credited with this move.

There also hasn't been any significant news within the past few days. VG reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage's comment on the situation seems to imply that the entire world just realized these couple of tidbits and all tried to enter at once. I'm not buying that. I think that's the equivalent of saying "We have no idea why our stock is up 500% in a week, but we're just as ecstatic about it as you are!"

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today is simply gambling. Without a clear driver of this extreme movement, there's no concrete reason why shares are worth so much more now than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day yesterday, VG moved up over $.20 (representing 20+% moves) in mere minutes. That's not the kind of momentum I'd want to be shorting into.

This is certainly an interesting story, and it'll be interesting to see how and where things settle down. Stay tuned.

Comments

[Tom Shohfi]

Despite it's trek down to sub-$100M market cap, VG has always had excellent liquidity which is making these monstrous moves even more baffling. Getting access to shares to sell short is difficult given "actual" naked shorting enforcement is also contributing to the mania. Fundamentals have been improving lately with two straight quarters of positive operating cash flow. At least in the short term, the market finally believes VG can avoid bankruptcy. They are doing better in terms of managing marketing expenses, but the balance sheet and customer bleed are awful. I wouldn't be surprised to see the stock back below $1 next week.

2009 Aug 26 10:49 AM

[Tony Petroski]

Mr Frankola: Nice try but:

"So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock."

No, but keep at it. There is an explanation.

2009 Aug 26 11:14 AM

[Aids Patient]

Well it's dropping like a stone now happy to have shorted it

2009 Aug 29 01:42 PM