Vonage Group (VG): Disaster in the making
Vonage (VG): There has been a lot of interest in Vonage Group (VG) in recent days. Last Friday (3/23/07) the stock tumbled 20 percent in the wake of negative news concerning their patent lawsuit with Verizon. It appears VG is losing the battle and the future of this company is even more questionable. As of this morning, the stock appears to be rebounding, trading up almost 18 percent at around $3.50 per share. The market might have over-reacted last week, but it was not without justification. This company has been a disaster since they first went public. Is this a buying opportunity?
The fundamental problem with VG remains. The company is spending a load of money on advertising in the hope of attracting enough new customers to offset their cost. Customer acquisition cost is out of control. In our view, people are hard pressed to change their habits given the telecommunication industry has a solid hold on consumer’s behavior. The concept of VOIP is great in terms of cost saving, but it will take more than creative commercials to convince the mass to switch to VOIP. The challenges before Vonage are immense to say the least. Couple this with the lawsuits; we highly doubt VG will be viable in the long term. Taking on the big Telecommunication companies is a daunting task. Even if VG could win this battle with Verizon (that is a big if), they’ll be more lawsuits to follow.
While VG appears to be inexpensive, be careful with this stock. The company does not have much catalyst moving forward. Profitability is far away, assuming it is achievable. The financial aspect of this company does not look good. The best that VG can hope for at this point is to get acquired by another company. However, we doubt that will happen anytime soon. We see slow death for VG. Eventually this company will run out of cash and fold.
