Back in February, hedge-fund manager Whitney Tilson made news when he called magicJack (NASDAQ:CALL) his next Netflix (NASDAQ:NFLX). While the stock initially soared, and is higher by nearly 30% since the call, increased pressure from the likes of Facebook's (NASDAQ:FB) WhatsApp might kill much of this speculation.

Finding the next Netflix
If we look back at what made Netflix great, the company was ahead of a streaming curve that brought video to your smartphone and tablet, which consequently allowed consumers to enjoy content away from their TVs.

Whitney Tilson has been dead right regarding Netflix's success, and has enjoyed large returns as the company shook off its 2011 free fall to now have a combined 48.35 million subscribers and revenue growth of 24.5% in the first quarter.

In many ways, magicJack is similar, having changed the landscape of wireline phone use with unbeatable prices. Not to mention, after losing more than half its valuation from September 2012 until Tilson's 164,000 share stake was disclosed, it's easy to see why the stock reminded Tilson of his famed Netflix trade.

With that said, the big question is whether a rapid declining wireline industry, which currently consists of 70 million households, can make magicJack the next Netflix amid the growing use of smartphones as primary home-phone devices.

Tilson believes that consumers will find magicJack's $2.50 per month service unbeatable, and that a change in management will create a new identity and end corny marketing gimmicks. Therefore, with Tilson's large bet in place, and many investors following his lead, the fundamentals must now carry the company.

The fundamentals sing a different tune
In the fourth quarter of 2013, magicJack saw its subscribers fall by 100,000 over the previous quarter to 3.2 million. Many investors overlooked this fall, citing a transition with management and new direction. But the stock is currently trading lower by 10% following first quarter earnings, as subscribers fell another 100k to 3.1 million. Hence, magicJack, the next Netflix, is losing subs by the quarter -- and fast!

Moreover, the company's total activations and gross margin also declined, while spending increased a rather steep 53% year over year. Given these results, it doesn't appear that new marketing initiatives are working, and therefore it's hard to imagine magicJack as the next Netflix.

The one bright spot is also challenged
With all things considered, some magicJack investors acknowledge that its core business might not succeed due to smartphones replacing wireline services. But these investors point to a successful voice-over-IP, VoIP, business called Free Calls, which is an application that uses 4G or WiFi to make free calls to the U.S. or Canada.

In the fourth quarter, Free Calls had 6.9 million users and saw a 23% increase over the third quarter. But in the first quarter that growth decelerated to 21% over the fourth quarter to 8.4 million users. Therefore, while this segment is growing fast, and is believed to be a powerful advertising tool in the future, its performance significantly lags that of its peers.

Specifically, Skype has over 300 million users; Viber has 200 million; WeChat has 355 million; and Facebook's WhatsApp has an industry-best 500 million users. Essentially, Free Calls added 1.5 million users in three months, but Facebook's WhatsApp is adding about one million users per day. Thus, WhatsApp's market share grows larger while Free Call's growth might not be at the same rate of the industry as a whole.

In talking about WhatsApp, many questioned Facebook's decision to pay up to $19 billion for an application that had 450 million users and created just $20 million in the year prior. But in seeing how WhatsApp continues to grow, and given the news of WhatsApp expanding beyond free messaging and into free calls, this is a disruptive service that magicJack's Free Call will be competing against head to head, which should worry magicJack investors.

Final thoughts
In looking at magicJack's last two quarters, it's really hard to identify it as the next Netflix. The company operates in two key segments, and its core continues to decline while its growth unit is miles behind the industry's largest companies.

Therefore, with a $300 million market cap, magicJack is not necessarily expensive, but rather priced accordingly based on a declining core business and a fast-growing mobile-calling unit. Yet as an investor, the most significant concern must be when WhatsApp rolls out its free calling app, because if Free Calls sees a decline, magicJack's stock loss could accelerate from its two-year rate.

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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.

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