What: Shares of communication services provider Vonage Holdings (NYSE:VG) 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.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.