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Vonage Is A Buy : Target Price 5.40 $ End Of The Year.

|About: Vonage Holdings Corp. (VG)

Vonage offers high-quality communication services over the Internet in the form of landline phones, mobile apps, and calling cards. Vonage has about 2.3 million active subscribers.

They focus and sell the service to various ethnic population segments that make international calls. Various World plans provide unlimited calling plans for international callers.

It distributes products via direct selling online, Wal-Mart, Best Buy, Kmart, Sears, Fry's & Microcenter, sales reps, and kiosks in areas.

Vonage appears to be undervalued and has favorable numbers and balance sheet.

Expected 2013 P/E: less than 11, at a current price of $3.14

EV/EBITA: 5

FCF: 36 million/year increasing

Large Non Operating Loss worth 70 cents a share.

Sales (NYSE:VG): $864 Million

EBITDA : $150 Million

Profit Margin 17%

EPS(2013): 0.24

ROE: 12% increasing

Total Shares 210 million: Float 164.8M shares

Value: $5.40 (based on projected P/E calculations) it takes into account estimated numbers and subscriber growth via Basic Talk during our research.

Catalysts

  • New deals with TATA and New Domestic (FCC) and International Regulations will decrease the cost of services.
  • Expansion into the business market.
  • Growth in international markets: Brazil
  • Generates considerable FCF (potential LBO target, TATA telecom/Reliance telecom)
  • New product launches and partnerships such as Basic Talk calling: According to our estimates, Vonage is adding about 3000 new subscribers every day via the basic talk plan. This amounts to about 8 million dollar growth in revenue per quarter.
  • Share buy-back program with 73 million dollars to spend by the end of year 2014, paying down debt.
  • Intellectual property investment: Increasing number of patents.

Questionable catalyst: Reach Me Roaming product: Vonage has touted this product for a while; does NOT seem to be a promising product but more like an effort to do something to disrupt the $40 billion roaming market.

Reason I say it is not a promising product is because it depends on the constant availability of Wi-Fi/Internet and does not provide a way to circumvent the traditional voice and 4G/3G charges.

COMPETITORS: Skype, Magic jack, large cable companies, AT&T, Verizon, and calling card providers. Magic jack is of particular interest in view that they can deliver a much higher margin even with a lower selling price on their services. This would raise a question on competency of the Vonage management

Threat: Customers can purchase similar but lower quality services from low-cost providers. If Vonage cannot innovate to build a moat, they face a tough competition to keep growing.

Innovation may be in terms of disruption of roaming services, cost reduction in long distance calls, etc.

Disclosure: I am long VG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.