Many Fools enjoy ignoring Wall Street's usual warning against "catching a falling knife." When a company with stellar performance is hit by a sudden drop in stock price, it can offer confident investors the chance to increase their positions on the cheap. When the panic passes, investors can reap big rewards.

Unfortunately, the J2 Global Communications (NASDAQ:JCOM) faithful have had to catch a handful of falling knives over the past few months. To judge by some of the chat-room soul-searching, many are beginning to wonder if they've got enough fingers left to count their losses.

The agonizing downhill roll from a 52-week high of nearly $48 to the current $20 makes investing in the firm look like a grim, Sisyphean task. But that's if you're only watching the chart. Beneath the roller coaster are some numbers that should have even conservative value players lifting an eyebrow.

American rappers sell cognac, French rappers start dot-coms
J2 was founded by a Parisian rapper named Jaye Muller. (I swear I'm not making this up.) Frustrated when he missed faxes and messages while traveling, he founded JFax in 1995. The simple idea behind the original company is little changed today: Combine fax, voice, and email messaging into one integrated service. Though the firm now offers more services -- such as conference calling, Web-based fax broadcasting, and email retrieval over the phone -- the tried and true fax-to-email product is still the backbone of the business. The free version of the service is an important tool by which the company attracts paying customers.

To do this, the company acquires phone numbers by the millions and provides them for use to J2 service subscribers and corporate clients. An increasing number of these phone lines are located in strategically selected cities around the globe, allowing premium-services customers to have a "local" presence in foreign lands.

After narrowly surviving the dot-com bomb, J2 got lean and mean, and began to thrive. It has put together 27 consecutive quarters of growing revenues and eight quarters of profits.

After steadily increasing its subscriber base, the company finished 2003 with $71.6 million in sales, a 48.5% increase over 2002. Gross profit margins are in the "to die for" range of 81%, up from 77% for the prior year. Earnings, as measured by modified numbers that strained out certain onetime benefits, shot up 86% to $1.04 per share. The current P/E on those adjusted earnings is 19. Nineteen! There are slow-growing leviathans like Ford Motor (NYSE:F) and McDonald's (NYSE:MCD) with only a fraction of the margins that are trading at higher multiples.

If you are thinking (and it would be Foolish of you to do so), "To heck with earnings. What about the cash?" There's good news there, too. J2 went free cash flow positive in 2002, generating $13.6 million. Last year, the firm produced $29.3 million. Based on year-end numbers and recent stock prices, with negligible debt, $46.9 million in cash and a market cap of $480 million, the company sports an enterprise value-to-free cash flow ratio of less than 15. That's less than Mr. Market's EV/FCF of around 23, and it's dirt cheap compared to most companies that are growing at the rates booked by J2.

So what gives?

J2 is dead
One of the causes for concern when I last checked in with J2 was the tax panic that occasionally sets in when companies come out of the red and get profitable. It's a fact of life. Uncle Sam comes by with a couple of his big guys, and extracts a little 30% to 40% cut off the profits. This has the effect of chopping earnings estimates for the year in which the taxman takes his first big bite, and casual observers are fooled into believing that the growth is over.

The real problem for J2 may be that investors seem to have lost confidence in the firm's technical moat, that sludgy, alligator-infested ring around the castle that keeps bad guys at bay. Indeed, there are a few barbarians at the gate.

A company that generates sales at J2's clip is bound to draw competition, and a quick Google search will drum up privately held companies offering alternative services of varying levels of sophistication, including Call Sciences',, International Telecom's, and Venali, against whom J2 recently filed a patent-infringement suit.

The wound inflicted by technology's occasional bites may be more serious. For instance, in a world of Web- and email-enabled cell phones, what is the likely market for J2's email-retrieval service?

But the biggest bogeyman of all is this one: Fax is dead. Fax is old, man, tres last week. Even J2 management has mentioned that the world's overall fax consumption seems to be slowing. So, how long can J2 survive if the fax goes the way of the dodo?

Long live J2
I believe the reports of Mr. Fax's death have been greatly exaggerated. Although computer geeks like me with scan-to-email facility never need to use a fax machine, there are millions of people who do. Face it: The fax machine is cheap, semi-disposable, and even my puppy, Zucca, could run one (as long as you bribed him with a cookie). And these millions of people will continue to send faxes to millions of other people, thousands of whom will elect to have the documents passed along to their email inbox via J2's services.

J2 continues to look toward the future, to capitalize on existing and remaining fax business, and to build a basis for its position in future communications systems. It has started by building bridges with a couple of the tech world's giants. Its free eFax service was integrated into Microsoft's (NASDAQ:MSFT) Windows XP, and was recently offered to customers of Time Warner's (NYSE:TWX) AOL Canada.

The firm also recently debuted a special service that incorporates secure Web-based fax solutions for legal offices. Further technological upgrades to be implemented this year include delivery of faxes in PDF format and optical character recognition systems.

Continuing its inroads overseas, the company can supply local phone numbers in 1,000 cities across 20 countries. Management has said that international expansion is a key to future growth, and J2's cash hoard and cash flow put it in position to be a leader in expanding markets.

The bottom line
From this Fool's point of view, the market's reaction to J2's challenges looks overdone. The firm has delivered amazing growth for several years, and has issued guidance for more of the same in 2004. Using the middle of the revenue range yields a target of 42% growth. Net earnings per share will look flat compared to 2003's numbers, but keep in mind that the company will be sending more than 35% of its take to Uncle Sam. On a pretax basis, the firm looks for a 55% increase. You rarely see growth potential like that selling at J2's multiples.

See what the Fool's J2 experts are saying on the J2 Global Communications discussion board.

Fool contributor Seth Jayson sends his missives via bullhorn or hand signal. He has no stake in any company mentioned above. View his Fool profile here.