Use VOIP to call your broker — and sell

And so we return to our story, to find our hero — the plucky little (or not so little) voice-over-Internet company Vonage — finally going public, after much back-and-forthing over the past year about when to issue stock and for how much, or whether to try and convince someone to take the company over. And what happens? The stock tanks, dropping by as much as 15 per cent at one point on Wednesday. Needless to say, that’s not what most IPOs are supposed to do (as Mark points out), especially since underwriters of initial offerings usually try hard to underprice the issue so that they get a little “pop” on opening day.

Well, Vonage definitely got a pop, but it was more like the sound a balloon makes before it deflates. Why? as Paul Kedrosky notes, it isn’t much of a surprise. While the term VOIP may be hot, industry watchers such as Om Malik have been warning for some time that Vonage is caught between a rock and a hard place — it has the name-brand value (courtesy of a very expensive marketing campaign) but it is being squeezed by free VOIP provider Skype on one hand and by cable providers on the other.

It’s true that by selling shares at $17 (U.S.) each, Vonage managed to raise a little over $500-million, giving the entire company a combined market value of over $2.5-billion. So we shouldn’t be holding any charity drives for CEO Jeffrey Citron, whose stake is likely worth about $1-billion or so. But at the same time, Vonage needs all that money to try and plug the gigantic hole in its balance sheet, which continues to drain money at a furious pace. Last year, the company lost $261-million, which was almost as much as it had in revenue.

The worst part is that Vonage’s costs are likely to remain roughly the same, or even increase, as the market gets more competitive — and yet its chances of becoming profitable are likely to fall, as Skype and the cable companies both put pressure on prices. Sound like a good recipe for an investment to you? Then Vonage would like to hear from you. Better use Skype to call your broker though, it’s cheaper. (Henry Blodget has a great anecdote from an AP story about a Vonage user who got some stock as part of the issue).

8 thoughts on “Use VOIP to call your broker — and sell

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  3. mathew,
    what i don’t understand is who bought into the IPO and why? i mean, we all knew it was a money-losing dog that has to advertise like crazy to maintain any sense of momentum. yet, they were still able to sell more than $500-million of stock. i mean, what were these investors thinking? did they really believe that they would score if they jumped into the IPO rather than wait and see what unfolded. i mean, vonage isn’t like the google IPO where “smart” investors stayed away because they thought it was expensive.

  4. Mark, I have to say I don’t really understand who bought it either. Maybe all the people like me who said Google was too expensive, and missed the boat 🙂

    Seriously though, I don’t know who bought it, but it was obviously people who didn’t really pay much attention to any of the market research or commentary out there. Maybe it was Vonage users who bought stock through the special offer they did, and then dumped it.

    My hunch is that it was probably fund managers looking to make a fast buck by dumping it after the first-day pop, except that they didn’t get one.

  5. Matthew, great to find your blog. I am a Canadian living in the London (the one in the UK) and still read the Globe online. Anyway, I blogged about Vonage this morning in response to the float. In my post I compare visits to Vonage’s website to that of Skype (in the UK of course). Skype receives 8.5 times more visits than Vonage and Vongage has not really seen a whole lot of growth in the past few months, while Skype continues to climb. The new partnership between Skype and Bebo seems to have really paid off.

  6. Thanks for the comment, Heather. It’s always nice to have another international reader. And thanks for pointing me to your post at Hitwise — those are some interesting stats.

    Mathew

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