Robinson is not the only one thinking that at $2.79 per share, Vonage is too cheap. Michael Lewis reminds us that even after a massive run-up on stock price over the past 12 months, Vonage Holdings Corp. (NYSE:VG) still trades for less than 5 times trailing EBITDA. And if we annualize the past quarter’s EBITDA, the company trades closer to 4.5x.
Now, remember when Microsoft Corporation (NASDAQ:MSFT) bought Skype for $8.56 billion in cash in 2011? In 2010, Skype had revenue of $860 million, on which it posted an operating profit of $264 million. This implies that Microsoft Corporation (NASDAQ:MSFT) paid almost a 10x multiple on annual revenue. Therefore, under a “Microsoft valuation,” Vonage could be worth as much as Skype back in 2011, since according to Morningstar Vonage’s annual revenue in 2012 came out at $849 million.
A final word on competitors
Note that Skype is Vonage’s main competitor. Vonage deals with this issue by performing aggressive marketing–the “Don’t believe the Skype” marketing campaign to promote Vonage Mobile is one example. Now, I have used both and have concluded that Vonage has nothing to envy Skype in terms of functionality and sound quality, which tells me that the company is prepared for fierce competition. However, Microsoft Skype’s main competitive advantages are that it is available on more platforms and it is more popular. Therefore, although “you’d still pay 30% less than you would on Skype” by using Vonage, I do not expect them to win this market soon.
Vonage is also competing against telecom giants like Verizon Communications Inc. (NYSE:VZ). The rivalry between Vonage and Verizon Communications Inc. (NYSE:VZ) is not new: in 2006 Verizon filed a lawsuit charging that Vonage infringed on five of Verizon’s patents related to its VoIP service. As a result, Vonage Holdings Corp. (NYSE:VG) had to pay $58 million in damages and a 5.5% licensing fee per subscriber per month. Luckily for Vonage, the emphasis on under-served populations and a strong pipeline of new products (Vonage World Plus and Basic Talk, which is launched nationwide via partnership with Wal-Mart) are strong competitive advantages in the making. Notice also that telecoms like Verizon spend huge amounts of money in maintaining their networks: about $9 billion per year just in wireless capital spending! Vonage is way more cost efficient.
But even without Verizon Communications Inc. (NYSE:VZ) directly marketing its VoIP services to consumers, the market is very fierce with Microsoft Corporation (NASDAQ:MSFT)’s Skype, Whatsapp, Line (mainly used in Asia) and Viber, just to mention a few names. But the emphasis on the Vonage Box, which allows users to use their Internet connection for computer and phones at the same time so that they can use Vonage for calling landlines, is a big competitive advantage that shall protect Vonage from fierce competitors, especially in emerging markets.
The article Why Big Telecoms Are Very Worried About This Stock originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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