By Sonya Colberg, TheStreetSweeper Senior Editor
Billionaire investor Warren Buffett once said, "Price is what you pay. Value is what you get."
We argue that Vonage Holding Corp. (NYSE:VG) is not delivering on the value as beautifully described by the Oracle of Omaha.
TheStreetSweeper offers this quick hit report on Vonage, provider of a VoIP (voice over Internet protocol) service that uses a customer's Internet connection to make and receive phone calls via phones or devices. The company's market cap is $1.37 billion and its price-to-earnings ratio is a stunning 62. Other viewpoints are available here.
Why The Stock Price Jumped
Vonage shares jumped Monday, when Canaccord Genuity initiated coverage on Vonage with a "buy" and a $7.50 price target. The report boosted the already highflying shares about 4 percent to ~$6.49.
Suddenly, Vonage found its stock price in this situation:
Vonage shares are currently beating the consensus price target of $6.31 per share, according to marketbeat.com data!
So Vonage could be in a nearly perfect position to plummet at this very moment.
Why We Expect The Stock To Plunge
*Ridiculous insider selling
They say you can judge a man by the way he wears his hat or the shoes he kicks off at the end of the day. We don't know about that, but we do know that you can tell a lot about a company by who is dumping its stock.
In Vonage's case, company officers and directors are selling their company stock like crazy.
In 12 months, insiders have unloaded a whopping 4 million shares! Some 112,500 shares were sold by insiders just in the past three months. Maybe insiders know something the rest of us don't know about the value of their company.
*Free alternatives, text messaging impact the Vonage market.
The company has enjoyed years of dominance in the consumer VoIP service area. But Vonage's chief market is maturing and shrinking.
Now, more people are using free alternatives. These include Skype and Apple's video calling service, Face Time, as well as the audio-only version, Face Time Audio, used with many devices and any Macintosh computer.
Additionally, people also are increasingly using text messaging, a use that's not available to landline phones which are part-and-parcel of Vonage's business.
The next generation is letting their thumbs do the talking. Their text messaging is beginning to replace talking on the phone, suggests new research by Pew Research Center.
Pew researchers determined 55 percent of all US teens prefer to send text messages to their friends daily and 27 percent send instant messages, compared with only 19 percent who call their friends daily on the phone.
Additional recent research, depicted by the chart below, indicates SMS texting is far more popular than other means of communication among Americans, as well as Australians.
*Vonage faces abysmal growth prospects in this new ring of rivals
Since its consumer market is shrinking, Vonage is moving into the business market, mostly via acquisitions.
Vonage used to handily knock down its light-weight competition, MagicJack, in the consumer market.
But the business market is a different jungle. Here, Vonage faces a ring of hairy-faced, temperamental apes such as RingCentral and 8X8. Of course, even bigger creatures like AT&T, Verizon and Comcast compete in this area, too.
Let's use the Bloomberg charts below to compare sales growth that analysts anticipate among Vonage (VG, $1B market cap), RingCentral (RNG, $1B market cap), 8x8 Inc. (EGHT, $737m market cap), and consumer rival little ol' MagicJack (CALL, $126m market cap).
Vonage (NYSE:VG) is expected to lose 1% to 3% of sales year over year in 2016. Then eek out +6% the next year.
RingCentral (NYSE:RNG) is expected to increase sales 32% in 2016, and 25% more the next year.
8x8 Inc. (NYSE:EGHT) is expected to increase sales 26% year over year in 2016 and another 19% more the next year.
MagicJack (NASDAQ:CALL) is expected to lose 1%-10% in 2016.
Investors want to see sales growth like that anticipated by RingCentral and 8x8. Instead, when they push through the dense jungle foliage to look at Vonage's prospects, they see those negative sales predictions. So Vonage and poor ol' MagicJack are huddled together in no-man's-land.
*Roll-'em-up and churn: Vonage desperately buys its revenue. And more business customers walk away after its latest acquisition.
Companies frequently get into big trouble by trying to buy their revenue. They acquire little companies quickly and then find they are not able to handle the transition or the new businesses themselves.
Vonage has been developing the bad habit of rolling up acquisitions much like the acquisition-crazed companies that TheStreetSweeper has warned investors about, including: Tangoe (TNGO, $19.55 day of article, ~$7.89 now), Swisher Hygiene (SWSH, $8 day of article, now~$0.58 ) and Revolution Lighting Technologies (RVLT, $4 day of article, now $1.16).
Indeed, Vonage has spent more than $273 million since 2013 on four merger and acquisition deals. Much of Vonage's business sales growth came from the $114 million acquisition in December 2014 of Telesphere Networks.
Based on the announcement that Vonage would pay 2 times Telesphere's estimated 2015 revenue, by our estimates only about 40 percent of Vonage's first quarter business sales growth(from $19 million to $42 million year-over-year) came from the original Vonage rather than the acquisition.
And Vonage appears to be paying dearly as it disrupts business while trying to transition in another business. Business customers left Vonage in increasing numbers.
Indeed, Vonage's business customer churn jumped 37.5 percent from Q1 2014 to Q1 2015.
Apparently, Vonage didn't like the way the business customer churn looked. So the company simply dropped the business part of the metric. Here's the relevant note in the recent 10-Q:
"(1)Customer churn differs from our previously reported Average Monthly Customer Churn in that our business customers are no longer included in this metric."
*Executive compensation last year exceeded $28 million. That is about 60 percent of the entire 2014 operating income.
(Source: SEC filing)
Investors are well advised by Warren Buffett to understand price is what you pay and value is what you get.
So stockholders are paying ~$6.41 per share for Vonage.
Considering the eye-popping issues, not even factoring in the long list of pending legal actions, we think the value of Vonage is about $4 per share - and that's very generous.
Disclosure: I am/we are short VG.