Please ensure Javascript is enabled for purposes of website accessibility

Why Vonage Holdings Corp. Stock Jumped Today

By Timothy Green - Jun 14, 2016 at 12:41PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An analyst upgrade and a hefty price target increase were enough to send the stock soaring.

Image source: Vonage.

What: Shares of communication services provider Vonage Holdings (VG 1.05%) jumped on Tuesday following an analyst upgrade. At 11:45 a.m. EDT the stock was up about 12%.

So what: Michael Rollins, a Citigroup analyst, upgraded Vonage stock from "neutral" to "buy," raising his price target from $4.75 per share to $8 per share. Rollins pointed to a favorable risk-reward trade-off, with the company capable of producing free cash flow in excess of 10% of revenue.

One big reason behind the upgrade was the cloud. Vonage is transforming into a CPaaS --Communications Platform as a Service -- company, and the recent acquisition of Nexmo, a leader in that space, accelerates that transition.

In a press release issued earlier this month, Vonage CEO Alan Masarek described the benefits of the acquisition with another acronym, UCaaS (Unified Communications as a Service):

"Nexmo enhances Vonage's UCaaS offering by incorporating messaging and web/app-based voice to address businesses' rapidly increasing mobile, social media and contextual communications needs. Whether helping the world's largest e-commerce platform to provide in-app messaging communications to end users, or enabling a leading global airline to connect its CRM software to chat apps and manage the customer experience, Nexmo is changing the way businesses communicate with their customers."

Now what: Rollins sees Vonage generating $120 million of free cash flow in 2017, good for a 10.5% yield on revenue. At the $8 price target, Vonage would trade for about 15 times this number. Rollins sees high levels of investment slowing down further margin growth, with both the core business and the CPaaS business viewed as "land-grab opportunities" by the analyst.

As always, investors shouldn't act based solely on analyst upgrades and downgrades. Investors should always do their own research and come to their own conclusions.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vonage Holdings Corp. Stock Quote
Vonage Holdings Corp.
VG
$19.30 (1.05%) $0.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
327%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.