Is magicJack a Netflix or WhatsApp in the Making?

Whitney Tilson thinks magicJack could be the next Netflix, but is a WhatsApp more appropriate after earnings?

Mar 16, 2014 at 11:00AM

MagicJack (NASDAQ:CALL) soared higher after its earnings on Wednesday, giving it 75% stock gains this year due to talks of it being the next Netflix (NASDAQ:NFLX). However, as fund manager Whitney Tilson makes big bets on the company's core business, it might be the growth of another segment, and its attractiveness to companies like Facebook (NASDAQ:FB), that'll create the real upside value.

Tilson makes a bullish bet
Back in February, fund manager Whitney Tilson published a report entitled "magicJack: My Next Netflix," which created quite a stir and has been a major catalyst in magicJack's exceptional start to 2014.

Tilson was known for his early investment in Netflix, but insists that magicJack has the makings of becoming just as disruptive in the wireline phone service industry as Netflix was/is to the cable industry; Tilson's firm now owns 164,000 shares. Furthermore, he makes a good case: The wireline industry includes 70 million households and regular U.S. callers in international markets combined, and magicJack provides service for an unbeatable price of only $2.50 per month.

According to Tilson, market size and price are two characteristics that magicJack shares with Netflix. However, it also has "fixable problems," which Tilson said were attributed to old management, including unsophisticated marketing, an unprofessional website, and spotty customer service, all of which are improving with new management and will create value.

Hard to identify the value
At the time of Tilson's call, magicJack was $13.75, but currently the stock is at nearly $21. Thus, at first glance, it looks like Tilson made a great call. However, with a market cap of under $400 million, magicJack is hardly the size of a Netflix, or a highly disruptive company to the wireline industry.

Moreover, while the company's quarter beat expectations, it's quite difficult to understand why the stock is soaring by 20%. The company's active subscribers fell by 100,000 quarter-over-quarter, now at 3.2 million. In addition, total revenue declined 7.8% year-over-year to $38.2 million, which is hardly a reflection of a Netflix-like company.

Tilson may be right, but
Essentially, Tilson was right in identifying magicJack as having an innovating product that works good and cuts costs significantly, much like Netflix in its industry. The problem is that online content viewing continues to soar while wireline usage continues to fall, as more-and-more consumers use mobile phones for primary use.

With that said, magicJack is yet to show us anything to imply that its core VOIP business will one day thrive with changes to marketing. However, it does have another segment that's soaring in use and popularity, which conveniently fits well with the growth of mobile phone usage.

FREE Calls: A WhatsApp in the making?
MagicJack has an app called FREE Calls, which uses 4G or WiFi to make free calls to the U.S. and Canada; it also includes voice mail. Thus, customers can use FREE Calls without using their mobile minutes, and in its infancy the service has been very popular. Specifically, it ended the fourth quarter with 6.9 million users, a 23% increase over the three months prior.

With that said, Facebook just paid $19 billion for WhatsApp, a company that allows its 450 million users to text for free using data or WiFi, meaning the two services go hand-in-hand, both being a telecom killer. While 6.9 million users is only a fraction the size of WhatsApp, magicJack's app is still growing rapidly and has the same advertising capabilities of any app, by using pop-ups or banners on its home phone screen.

Hence, this growth segment of magicJack's business might very well unlock tremendous upside value in shares of the company, especially as an acquisition target. Facebook is interesting as a potential acquirer because it's in the business of purchasing eyeballs, or users, rather than current revenue. In fact, WhatsApp earned just $20 million last year, but if we gauge the acquisition by current users, then Facebook paid more than $40 per sub. Also, with a free text and call service Facebook would become a very disruptive and even dangerous company to telecom industry, perhaps giving it an edge and allowing for a successful reentry into the smartphone industry.

If we apply a $10 per sub value to FREE Calls, then this segment is worth about $70 million, which then makes magicJack at 7 times earnings look more attractive from a valuation point of view. Not to mention, as FREE Calls continues to grow, an acquirer might find it even more attractive, meaning this is a conversation that could really intensify in the quarters ahead, assuming 20% plus growth is sustainable. And if not acquired, magicJack can begin to roll out ads that could spark growth, thus pushing shares higher.

Final thoughts
Tilson might be right is predicting upside potential for magicJack, but given the demand for services of similar nature to FREE Calls, he might be wrong in which segment of the business creates the upside potential. With 6.9 million users, magicJack has had a successful launch of this service, and if it can continue to grow, and if marketed efficiently, then magicJack might in fact be the next Netflix, just not in relation to its core business.

Here are 3 stocks that will help you retire rich
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook and Netflix. The Motley Fool owns shares of Facebook and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers