Trader’s Narrative

Bloomberg reported recently that Greenfield, an analyst at Pali Securities, downgraded Vonage to a sell after he called to cancel and was given a special lower price to stay on as a customer.

Greenfield is jumping the gun a bit if he downgraded Vonage to a ‘Sell’ just because they have a bit of a separation anxiety. After all, following such a criteria, all cable and telecom companies would also have to be downgraded.

But in the case of Vonage, this is a tell for a much more serious issue. We already know that each new customer costs them on average $270+. This means that it takes them more than a year to break even on that new customer.

The voip sector is also getting crowded with every established carrier and cable company rolling out their own. Established companies have the advantage of being able to bundle their voip with other services like satellite tv, cable tv, cell phone packages and other goodies. As well, they have a headstart with an existing customer base.

Then you there are the computer based voip services like skype and gizmo which the more tech savvy tend to use. I’ve recently taken advantage of skype’s special promotion to make free calls to landlines within North America. The quality of the calls are surprisingly good and the price isn’t bad either.

So with all this competition, what is Vonage going to end up doing? Pay clients to use their services?

Another challenge for Vonage is their churn rate. They need a lot of new customers to replace those that are leaving… so they have to keep running to stay in the same place. And with clients leaving right, left and center, they have no pricing power:

Source: GigaOM

Leaving aside fundymental concerns (they give me a headache), we see that technical analysis draws a similarly negative picture:

As you can see, Vonage is getting crushed. I know, I know, the market hasn’t been doing too well lately. But still, Vonage’s relative strength is nill. Even on the days when the general market rallied strongly there is almost no discernible response on its chart.

Notice how the price has contracted just below the round number $10 and on Friday managed to breakdown below the congestion. People might think that Vonage is ‘cheap’ here as it is below $10. But beware! a stocks can always get cheaper.

I just checked and IB has VG available for borrow - Hmmm…