Vonage: Ring and Ka-Ching

Since the dot-com crash, the IPO market has been a fairly conservative place. When it comes to tech offerings, investors mostly want highly profitable companies such as Google and

Well, this week, IPO investors will have something new: Vonage (NYSE: VG  ) , a highly unprofitable company.

In fact, that's a key part of the company's strategy. That is, Vonage wants to dominate a fast-growing new category, VoIP (Voice over Internet Protocol). So long as you have broadband access, you can hook up Vonage technology to your phone. Voila -- cheap calls. Vonage's basic phone plan costs a mere $14.99 per month.

The revenue growth ramp at Vonage has been stunning -- increasing from $18.7 million in 2003 to $269.2 million in 2005. However, during the company's history, it has accumulated huge losses, including a loss of $261.3 million in 2005. In the first quarter, revenues were $118.9 million. But despite the growth, the company still posted a loss of $73 million.

Vonage has been carpet-bombing the country with advertising -- television, Internet, everything. Last year's marketing expenses of $243 million were disturbingly close to the company's revenue level. The IPO itself should be a good marketing vehicle for driving customer growth. Moreover, Vonage has set aside 15% of its IPO shares for existing customers.

While the company has a strong brand and infrastructure, its competition is fierce. eBay (Nasdaq: EBAY  ) has Skype, and there is a new offering from Time Warner's (NYSE: TWX  ) AOL.

Just as it's easy to sign up for VoIP, it's also easy to move to a cheaper alternative. The cable companies can offer bundles of video, broadband, and VoIP, with the latter as a loss leader. This should put further pressure on the pricing for VoIP.

Despite those problems, Vonage's IPO is expected to do well. Given the company's 1.6 million subscribers, there should be enough people willing to pony up money for the IPO as. The deal looks to be valued at under $3 billion, but given Vonage's losses and competitive environment, that isn't cheap by any means.

In the short run, Vonage should be able to get much-needed cash. But over the next few years, the company will need to find ways to achieve sustainable profitability -- which may be nearly impossible given the infrastructure costs, customer support, marketing, and intense competition that already exists in the marketplace.

Given the level of retail investor interest from existing Vonage customers, the IPO may pop on the first day. But as is usually the case with IPOs, buying stock in the aftermarket is a dicey proposition -- it's more for daytraders than real buy and hold investors. Also, the time of an IPO is typically the maximum point of hype and media interest -- which further inflates the valuation. In other words, this is one to stay away from, at least for now.

Time Warner and eBay areMotley Fool Stock Advisorpicks. Take the newsletter dedicated to the very best of David and Tom Gardner's selections for a30-day free spin.

Fool contributorTom Taullidoes not own shares mentioned in this article.

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