MagicJack Stock Has Doubled In 2012...And It's Still Cheap

| About: magicJack VocalTec (CALL)

Since my first analysis on magicJack (NASDAQ:CALL) on July 17th, shares of the Voice over Internet Protocol (VoIP) service company have soared nearly 30%. On a year-to-date basis, the stock price has actually doubled. Investors have reaped quite an impressive return in a short window of time.

So why have magicJack shares been so hot?

The company is executing on its growth plan and all the while exceeding its own lofty projections. In fact, management upped revenue growth and bottom line estimates twice during the last quarter. In the end, second quarter earnings actually exceeded those raised targets. The company attributed most of this to higher sales of its new magicJack PLUS product as well as renewal contracts for ongoing services.

History appears to be repeating itself.

Like investors saw last quarter, company management recently cranked growth estimates upward yet again. In fact, earnings are now set to be between 55 and 80 cents for the third quarter, far surpassing the 35 cent EPS estimate a year ago.

Year-over-year revenue projections were boosted as well, from an already impressive 25%-40% growth rate to a pace of 35%-45%. 2012 earnings per share estimates also rose 20 cents, now targeting profits between $1.70-$2.00 for the full year. Revising such rapid growth projections higher is not only impressive, but shows that management continues to execute well.

In addition to this growth, magicJack recently reported that its telecom net costs are down to $1.00 per customer per year, a mere third of what they were a few months ago. Management's war on cutting costs appears to be paying off, which should result in an increased portion of revenue flowing to the bottom line.

But what continues to make CALL shares attractive for investors today is that the share price has not kept pace with these stronger sales and upwardly revised estimates. Although magicJack's stock has enjoyed an impressive run, the market is still not fully appreciating the company's markedly improved earnings and revenue growth which have outpaced the stock performance so far this year. Investors are bound to see turbulence as many pocket hefty profits. But downside at this price level is limited while a continued long-term push higher is likely.

2012 earnings per share estimates have surged nearly 40% in the past few months. Projections for the current year have actually caught up with and are now near or exceed 2013 EPS estimates. If the company hits its own year-end targets, the stock will have a P/E ratio under 13 at today's prices. This number indicates the company is undervalued. This number is below average for technology company, much less for a rapidly growing and profitable one. Investors are not accounting for this rapid change in earnings outlook, as the multiple investors historically are willing to pay per dollar of earnings as fallen far below the company's own historical average.

But contrary to the current valuation, magicJack has brighter days ahead of it. The company has just begun the rollout what will be several new products and services.

In Q4, magicJack will be releasing a new product which will utilize Wi-Fi technology, with advanced features and improved call quality. The unit will join magicJack PLUS on store shelves, while the original magicJack invention will be phased out. Both new products are far more advanced and convenient for consumers; but importantly, they also boast larger margins.

magicJack also quietly unveiled an app for Android devices earlier this month. It has already secured well north of 100,000 downloads. Although it is early, the app is receiving good initial reviews with a 4.3 out of 5 average score from users. My personal testing showed the app is very good at what it does: allowing calls completely free over a Wi-Fi network. The call clarity is good. What was more impressive was how simple it was to use. There was no signup required, simply a free download. What this does for magicJack is create much easier access to a very broad consumer base while keeping costs at a minimum. The company plans to begin monetizing this is the coming months.

The company is also adding text messaging features to its products. For example, text messaging will be rolling out to the Android apps in the second half of 2012 and will also be available on its new Wi-Fi unit. Such a feature will further push consumers into purchasing magicJack's services. Management also has hinted at ongoing projects geared towards a play on LTE femtocells "in a big way."

As savvy investors have observed, magicJack has already begun rolling out several promising new products, in addition to its existing successful product and services. However, the company has not begun monetizing any of these new products yet. Despite this, the stock is trading at relatively low valuations, as if no additional growth will occur in the future.

The risk for investors remains quite low as downside risk is limited. Management has expressed that the current quarter sales are strong and have already met or surpassed estimates. For argument's sake, even if the company only hits the bottom end of its year-end earnings projections (which would mean at this point that sales growth would have to abruptly halt), the company would still have earnings-per-share ratio under 15 at today's prices. Even with this conservative scenario, the stock would be undervalued, trading at a level below its historical average P/E. Thus, there would not be a lot of downside risk with this sudden slowdown.

But what also limits risk for investors is that 2013 earnings estimates have not been raised by the company, despite the significantly improved profits throughout 2012. Earlier in the year, the company noted that 2013 earnings would far surpass 2012 as new, higher margin products were set to hit the market. However, as earnings for 2012 have nearly doubled as sales improved, 2013 estimates have yet to be officially raised.

This has two ramifications for investors. For one, even if growth is completely flat next year, shares are already fairly priced as 2012 earnings are on pace to match 2013's low-end numbers. Secondly, investors should expect 2013 estimates to be revised upward, likely significantly so. In fact, CEO Daniel Borislow recently noted that the release of new products will indeed lead to increased profitability next year. Such a revision will provide a positive boost for the stock.

Last week magicJack reiterated its share buyback program. Management will continue purchasing the shares as long as the stock remains "undervalued". With the upcoming release of many new higher margin products, continued strong sales, and increased profitability-wise investors should take note.

Disclosure: I am long CALL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.