The Worst Stock for 2007: Vonage

I love those Vonage (NYSE: VG  ) commercials. You know, the ones with the lady at the beach running off into shark-infested waters, or the nerd breaking up with his hot girlfriend. "Vonage," the catchphrase goes, "one smart decision among many, many stupid ones."

Well, I guess you can add getting in on this year's Vonage IPO to the laundry list of stupid decisions.

Not so bon Vonage
The voice-over-Internet-protocol pioneer went public in May at $17 a pop. Two days later, it was trading at $13. When a stock tanks this quickly, looking around for the exit turnstiles is usually a good move. If an established underwriter can salvage its reputation by supporting the stock above the IPO price, it's going to get ugly in a hurry.

So it's not much of a surprise to see the stock fall into the single digits just seven months later. Vonage has surrendered more than half of its value, but the slippery slide didn't really surprise anyone. Seth Jayson, Tom Taulli, and Bill Mann all took the stock to task as the new issue hit the market.

Vonage's allure is simple. For $24.99 a month, customers with a broadband connection can make unlimited calls to anywhere in the United States, Europe, and Canada. Unfortunately, it's perhaps too good of a deal to benefit Vonage's bottom line, while at the same time not offering a compelling value proposition for its customers. How can that be? A lose-lose scenario?

Let's look at it from Vonage's vantage point. In its brief history, Vonage has accumulated a deficit of $604 million. Certain operational metrics are improving, like higher subscription revenue per user and lower telephony services overhead per subscriber, but Vonage is still losing a ton of money. The company is spending an average of $254 for each gross subscriber that it adds. That may have been a sound strategy when it seemed as if its only real competition came from pricier plans from big telco players like AT&T's (NYSE: T  ) Callvantage. But it's trickier now that you have cheaper soft phone alternatives like eBay's (Nasdaq: EBAY  ) Skype.

That's where it gets dicey for customers. Even though Vonage has quickly grown to service more than two million lines, it's hard to pitch innovative products like a USB-port V-Phone that turns any broadband-connected computer into a Vonage phone when a simpler (and likely cheaper) solution is to just install Skype.

Even though Skype will no longer be free come January, the value proposition is still an attractive one. Vonage fans? I hear you. Vonage offers several features that Skype does not. However, Vonage also lacks some of the more conventional landline features, too.

If your broadband connection goes out, so does your phone. In some cases, dialing 911 won't transmit your contact information to the local emergency center (and in even rarer cases, it will have to be rerouted through a Vonage-run national center, adding one more step when time is of essence).

The colossal blunder of 2006
Companies losing money handset over fist may not be new to you. IPOs that shed nearly 60% of their value are hard to come by, but still not endangered. The reason that I think Vonage deserves to be tapped as the top dud of 2007 stems from a hairy incident in which Vonage allowed its customers to get in on the IPO.

I'm the first to applaud companies that reward their clients. It's why they're able to go public in the first place. I took part when Boston Beer (NYSE: SAM  ) did it, with IPO applications on Sam Adams beer packages, and I'm still kicking myself for not going through with Google's (Nasdaq: GOOG  ) offer for $85 shares.

However, because Vonage tanked out of the gate, many subscribers refused to pay for their diminished shares, and Vonage's initial reaction was to go after them to pay up. Nothing smells as rotten as a company hounding its loyal base of users to pony up for a sour investment.

Losses will narrow for Vonage in 2007, but the red ink will continue to spill for a couple more years. Vonage is also not growing as fast as the VoIP market as a whole. TeleGeography estimates that the niche grew 18% sequentially in the third quarter, while Vonage's line count grew by just 11% in that time.

When Vonage rings? Don't answer. Ask for it to call back in a few years, when it will be either a viable business or a creepy call from beyond the grave.

Agree? Disagree? Please let us know in our brand new in Motley Fool Caps stock database by rating Vonage "outperform" or "underperform." Just click here to join CAPS, and we'll declare the worst stock for 2007 early next week.

Want to go back to the beginning of our Worst Stock for 2007 tournament? Right this way.

Skypeparent eBay is aMotley Fool Stock Advisornewsletter recommendation.

Longtime Fool contributor Rick Munarriz is a new tech junkie, but he's not a Vonage subscriber. He used Skype on his summer vacation and saved a bundle on phone calls. He does not own shares in any of the companies mentioned in this story, and he is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance.


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