I am a little bit tentative about recommending an entry point for Cbeyond in the very near future. This month has been an extremely bumpy one for the stock. We are seeing the Bollinger bands narrow, which indicates some slow down in volatility and, possible, the formulation of a new trend. Our MACD, EMA, OBV(5), and Fibonacci analysis looking very bearish for us. The CMF(5) and Accumulation/Distribution(5) are looking pretty neutral and the Stochastic analysis is bullish. As I mentioned above, I am really looking for this one to break, and maybe even consolidate above $29.85, before considering an entry point.
Looking long, I have to say that I am very excited about this growth stock. It demolished analyst expectations by overwhelming margins each of the past three quarters. The company has a focused mission to be the all-in-one telecommunications solution for small-medium sized businesses. The Company’s services include local and long distance voice services, broadband Internet access, email, voicemail, web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and IT services. While the company is centered on VOIP technology, its approach is simplicity for new and existing customers … ok, yes, it’s new technology, but you won’t even know - and it’s true, as one blogger put it: "it just works."
At first, I was somewhat hesitant when I saw the wide-array of services offered by CBEY, but as I did my own little market research, I realized this is exactly the solution small businesses need. I mean what business wouldn’t ask for "give me it all but keep it simple" from their service providers? Moreover, small businesses are also largely attracted by the fixed-price model CBEY generally employs. Tech, or tech-forward, companies will also love Cbeyond’s T-1 broadband connection, which is being offered at a price many could not afford previously. Forbes recently reported that the company saved a real estate firm $65,000 annually.
The company has been successful in the roll out of their service in 5 metropolitan areas (Dallas, Denver, Houston, Chicago, and Los Angeles) with San Diego just under way. The company has aggressive plans to grow, but here is what I love: they plan on growing the right way. Sure this company could take on a billion dollars in debt and blow this thing out to the top 20 metropolitan areas today - but that’s not what has made them successful in the past. They remain committed to aggressive growth, but in a very measured (and thus far DEBT FREE!) manner. "In launching out business in each new market, we use the same disciplined financial and operational reporting system to enable use to closely monitor our costs, market penetration, and provisioning of customers, and maintain consistent standards across all of our markets."2 With San Diego already underway in 2007, the company promises (and I believe will deliver) two additional cities this year.
Cbeyond is not just growing out, but also up. To help grow among existing, as well as new customers, they offer a variety of communications solutions, most recently with the addition of mobile service. As mentioned in the profile, their total services include: "local and long distance voice services, broadband Internet access, email, voicemail, web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and IT services." Customers in 2006 used an average of 5.6 CBEY applications. I would hope they could work to increase this number to over 6.1 in 2007 while increasing customers in existing markets by 30%. This would help the company maintain its impressive growth while it expands in a much more measured pace into new markets.
I need to clear the air on the main question mentioned by a lot of people, including the reader who requested this write-up. The Vonage legal issues seem unlikely to effect this company, according to the CEO. This has to do primarily with the type of network used by CBEY, which is also one of its greatest strengths. To operate its system, Cbeyond does not use or borrow public or standard internet IPs. Rather, in each of its coverage areas (currently 5 metropolitan areas, see below) it uses its own secure and private network - not the public internet. CBEY, unlike most of its competitors, only uses a single all-IP T-1 connection for its data and voice communications. According to the company, "Our network design exploits the convergence of voice and data services and requires significantly lower capital expenditures and operation costs compared to traditional service providers using legacy technologies."1 This will help the company’s growth strategy by lowering the cost of network components necessary to start in a new marketplace; leasing fewer telecommunications circuits; minimizing staff needs, co-location space, and maintenance costs; and more. Speaking of costs… what about billing? Well Cbeyond wisely does not use paper statements - only email. Full details are always available on the easy to use website and - get this - 35% of their customers pay online! Imagine the costs they will save on customer support and no-skill accounting paper chasers.
There are a variety of potential risks facing Cbeyond. For me, there is going to only be one true test to this company - and that will come from the roaring speed of technology and its ability to remain competitive in the field. Right now,CBEY has a nice, almost quiet existence, in its 5 main cities. As CBEY grows, so will its competition, including legacy carriers, cable companies and mimic providers. Currently, I do not believe existing VOIP providers can (or want to) compete directly with CBEY. However, the company may face stern competition from legacy telecom companies and almost surely from cable companies. The business play is a big chunk of the pie for them and they’ll hate to see CBEY siphoning off any piece of it.
My new position recommendations:
Short term: HOLD/WAIT below $29.85
Long: STRONG BUY
Short sell: NOT RECOMMENDED
My price targets:
Short term (1-2 mos): $30.50-$31.00 (5.5%-7.3%) (depending on when it comes over $29.85)
Long term (1 yr): $35.00 (21%)
Target: $34.50 (19.4%)
Last: Lowered to Outperform from Strong Buy by Raymond James (03/02/2007).
My industry outlook:
Disclaimer: I have no current or past position in Cbeyond Inc.