Buying Vonage (VG)

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July 27th, 2009   |   1 Comment

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I’ve written about Vonage (VG, current price $0.40) awhile ago, and I now believe the stock offers a good risk/reward at current prices.

Vonage (VG) is one of the leading providers of VOIP services.

The main reasons for entering a position now are as follows:

  • The stock is trading near its all-time low of around $0.30.
  • Almost anyone who hears you mention VG as a potential investment, will shudder at the prospect.
  • There are nearly zero Wall Street analysts covering the company.
  • Despite the negative halo surrounding the company, financials are beginning to show dramatic improvement, with EBITDA jumping last quarter to over $18 million from $8 million last year.
  • Debt has been entirely restructured and there are no near-term major repayments.
  • On the subject of debt: Vonage is highly leveraged, but given their improving cash-flow, we think the company will have an easy time refinancing this debt in the future, at much lower interest rates, and thereby greatly increasing returns for equity holders
  • Valuation is incredibly low with an EV/Sales of around 0.3 despite very good margins and the recurring nature of the business.

    • Incidentally, I have two Vonage lines and have used them happily for five years already. The service is great and I’m probably a customer for life. I’m sure there are many people like me, so clearly there is a business here. How much of a business, I have no idea. But it’s obviously viable, even if it does not have major growth prospects.

    So if VG is able to continue to report solid profitability improvements the value of the company’s equity should increase dramatically. At the same time, if the company disappoints I don’t see much downside, since the equity is already considered practically worthless.