Trader’s Narrative

As a student of sentiment, I try to keep a sharp lookout for new, wacky ways of taking the mood of the crowd. There are the traditional methods. And then there are other more unorthodox ways of seeing sentiment.

Just recently I’ve been paying more attention to the keywords that people use to find my trading blog. Just a few days ago I started noticing something interesting. Quite a few people were googling: “I Hate Vonage!” and “We Hate Vonage”… which would take them to my post, Vonage: Please Don’t Leave Us!

Not only has Vonage had a very difficult time over the past year to make money and retain customers, recently insult was added to injury when a judge ruled that they had infringed on patents held by Verizon and ordered them to stop taking on new clients. Ironically, this might be just the thing Vonage needs since every new client brings with it much more expenses than concomitant income But the market was ruthless in punishing the stock as it gapped down to reach just below $3.

Tangentially, since I’ve promised to hold myself accountable in my previous opinions, I’ll take this opportunity to give myself an A+ for this call. The red arrow is when I made my first post about Vonage. The next day it gapped down and fell into the ~$9 area, consolidated and fell further. Never to see that level except when it came back a few months later to ‘kiss’ the resistance level.

Getting back to sentiment, when I see people actually typing in ‘I hate Vonage’, the contrarian in me feels an almost irresistable temptation to go long. I’m not sure though if these people are customers or shareholders (or both!). As Rothschild said, ‘Buy when there’s blood on the street!’. There isn’t any blood on the street perse, but definitely it is splattered all over the Vonage chart.

The MarketWatch’s individual stock sentiment measure is slightly negative (52% bears and 48% bulls) but the sample size is very small at slightly above 100 respondants. At the very least, I think that Vonage’s stock has reached a crescendo of negativity. So if you’re still short, I wouldn’t press it. And if you have no position, crazy as it might sound, it just might be smarter to go long than short.

By the way, we’re into the last days of my first trading blog contest. If you’re interested in sentiment, and you haven’t entered yet, hurry!

The race to zero is gathering speed in VoIP-land. First it was Skype giving away free calls from their network to landlines and cell phones in Canada and the US. I tried it and found the quality to be very good. Skype recently extended the free outbound calls to the UK, Japan and Mexico (aleit for just one weekend each during July).

Now, Gizmo announced free outbound calls to landlines and cell phones to 60 countries! Just like you I thought there’s got to be a catch. Well there is, but it is not much of a catch. Gizmo wants to bulk up to critical mass and they are giving away this free calling capability to attract attention and active users.

The requirement is a bit vague:

No purchase necessary. The All Calls Free plan applies when both call participants are registered and active Gizmo Project users. A person is considered active when they are making phone calls with Gizmo Project on a regular basis. We reserve the right to limit call length.

In their press release though, they explain that the requirement is that you make just one Gizmo to Gizmo call before you can make free outbound calls. And don’t get scared away by the last condition. Skype also has that. It is a standard clause to protect them but it is almost never enforced unless you abuse their system on a massive scale.

I have to hand it to Gizmo. This is a brilliant strategy that will quickly build up their base. They really needed something like this since offering a better product and service wasn’t enough to unseat the well entrenched players like Skype. And don’t forget, Skype’s offer of outgoing calls ends at the end of this year. Gizmo’s doesn’t have a termination date.

You may think this is a gimmick from a wanna be VoIP company but Gizmo is anything but. I’ve known about them for a while and eventhough I prefer it over Skype I’ve been stymied because others simply have not even heard of it. This is baffling since Gizmo has tonnes more features: call in numbers in the US and England, up to 99 person conference calls, one click call recording, voice mail, and it is built on open source SIP technology. Gizmo also offers a really cool feature which uses Google Maps to show where the other person is on the globe.

Go ahead and download Gizmo and take it for a spin - and then be sure to tell your friends about it too. And then think about shorting some Vonage. By now, all their executives must be curled up in the fetal position under their desks.

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…