j2 Global Communications (NASDAQ:JCOM) has been one of the best-performing stocks on the market in the last two years, rising about 2,000% even after today's 20% haircut. This smallish company (with an $800 million market cap) provides outsourced messaging and communication services, including its popular "eFax" service, as well as voicemail, Web-initiated conference calling, and other dialogue based services.

j2 has achieved greater than a 50% compound annualized growth rate (CAGR) during the last few years, while sales in the third quarter announced last night rose 51% to $18.9 million, and earnings per share increased 75% to $0.28, or $7.2 million.

Free cash flow for the quarter was a monstrous 40.7% of revenue, at $7.7 million, up 87% year over year. j2 deserves praise for breaking out free cash flow in its quarterly statement -- far too few companies do this. Gross margins topped 86%, and operating margins were above 41%, both better than eBay's (NASDAQ:EBAY) margins.

Subscription revenue made up 94% of third-quarter sales, adding predictability to future results, while the company has been able to grow subscriber revenue by 5% to 13% per quarter since 2001. This high-margin, high-growth company also has $46 million in cash and essentially no long-term debt.

So, why is the stock falling so hard?

The company increased its fourth-quarter and year-end guidance, but fell shy of aggressive analyst estimates for the year-end. It expects $0.31 in earnings per share in quarter four, and $1.03 per share for the year, up from earlier guidance of $0.96. The five analysts covering the stock expected $1.00 to $1.19 per share, skewing the average to $1.05 and putting j2 two cents shy of the year's consensus estimate.

All of which goes to suggest, so what? A few analysts were too optimistic on top of already strong projections. The company, meanwhile, has not disappointed nor misled. Given this, today's 20% price decline may spell opportunity.

j2 has generated about $20 million in free cash flow this year, and should earn at least $28 million total in 2003. At $35 per share, the company's enterprise value-to-free cash flow multiple would be around 26 at year-end, while free cash flow was up 87% last quarter. On an earnings basis, the stock is at 34 times new 2003 guidance, while earnings rose 75% last quarter. The stock trades at a 25 multiple to 2004 earnings estimates, while 37% growth is currently anticipated. (Watch to see this estimate doesn't come down.)

Based on current growth rates, j2 Global looks undervalued.

j2 Global Communications looks like the type of strong, highly profitable company -- trading at a multiple below its growth rate -- that Motley Fool Hidden Gems highlights each month.

Jeff Fischer has a stake in eBay.