Please ensure Javascript is enabled for purposes of website accessibility

Ooma Stock Upgraded After Earnings: What You Need to Know

By Rich Smith – Nov 28, 2018 at 12:36PM

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

Ooma beat earnings estimates, still isn't profitable -- and William Blair doesn't even care.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Voice over IP phone service provider Ooma (OOMA 2.19%) is seeing its stock surge in Wednesday trading, one day after reporting fiscal Q3 2018 financial results that exceeded Wall Street's expectations.

Ooma's getting a reward from Wall Street as well, with William Blair upgrading Ooma stock from market perform to outperform. Between the two developments, Ooma shares shot up more than 23%. (And it's still up about half that amount as we approach the midday mark.)

Here's what you need to know.

Word cloud featuring words VOIP SERVICE

VOIP may be the future, but are there profits in VOIP provider Ooma's future? Image source: Getty Images.

What Ooma said

Heading into Q3 2018, Wall Street analysts were looking for Ooma to report about $0.06 per share in pro forma losses for the quarter on sales of $31.7 million. In actual fact, Ooma reported sales of $32.6 million, and a loss only half as bad as Wall Street had feared -- just $0.03 per share.

Commenting on the quarter, CEO Eric Stang said: "Q3 was an outstanding quarter for Ooma, with significant growth in recurring revenues and continued strong execution on our key FY19 strategic initiatives. Core recurring revenues grew 20% year-over-year."

The company also issued upbeat guidance, predicting losses of $0.04 to $0.06 per share in Q4 (at the midpoint, a penny better than analyst estimates), and a $0.16- to $0.18-per-share loss for the year. (This is good news, because Wall Street was worried losses could be as great as $0.20 per share.)

Management expects that its revenue, too, will exceed estimates for both the current quarter and the year.

What William Blair said about that

Reviewing the news, analysts at William Blair were ebullient. Ooma is showing "consistent execution" and "solid" results, they said in a note covered today on That fact alone might have been enough to prompt William Blair to upgrade, but the real kicker for this stock is its valuation, say the analysts: "With Ooma currently trading at a multiple less than half that of the peer group, we believe this is an attractive time to buy the stock."

Some thoughts on that valuation

But is it, really? Is Ooma really selling for such a huge discount to its "peer group," and does this make it a buy? The answer probably depends on what "multiple" we're talking about here, and which "peers."

If you take an expansive view of the telecom industry, Ooma arguably competes with everyone from marquee name telecom companies like AT&T and Verizon, to phone service-providing cable companies like Comcast -- all of which offer cellphone service as well as the landlines that Ooma's VoIP services aim to replace. Conversely, a more constrictive view of Ooma's business leads us to just one name-brand, publicly traded peer to which we can compare it: Vonage (VG).

And compared to Vonage, I almost see where William Blair is coming from. With a market capitalization of $2.5 billion and trailing annual sales of $1 billion, Vonage stock sells for about 2.5 times annual sales. Ooma meanwhile, at a market cap of about $266 million before today's upgrade, cost only 2.2 times sales. That's a significant discount to Vonage's market cap. It's not, however, "less than half."

Of course, the real problem here is that aside from revenue, there aren't a whole lot of other metrics on which to value Ooma (at least not positively) relative to a peer like Vonage. Neither Vonage nor Ooma, for example, is currently earning GAAP profits, so valuing them on P/E is entirely out of the question. And if you try to compare the stocks on free cash flow, well, Vonage generated a very respectable $125 million worth of such cash profits over the past year, giving it a 20-times-FCF "multiple." Ooma, on the other hand, burned through negative $3.2 million in free cash flow -- and indeed, according to S&P Global Market Intelligence data, Ooma is free-cash-flow negative in most years, which makes it hard to value the stock on that basis as well.

The upshot for investors

So what's the takeaway for investors here? Ooma beat earnings estimates yesterday -- on that there's no debate. However, Ooma did so without actually earning anything. Indeed, Ooma has lost money for as far back as S&P Global keeps data, and most analysts are forecasting that Ooma will keep on losing money for as far forward as analysts have published estimates (i.e., at least through 2020).

William Blair may believe that this makes Ooma stock a good choice relative to its peers. But objectively speaking, I can't say I find much to like in these numbers.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends CMCSA and VZ. The Motley Fool has a disclosure policy.

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

Ooma Stock Quote
$13.50 (2.19%) $0.29
Vonage Holdings Stock Quote
Vonage Holdings

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

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.