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Sometimes you love a company's products and services, but would never invest a penny in the stock. That's exactly how I feel about Internet-based phone service provider Vonage
Love the product, hate the stock
This dichotomy comes in two distinct flavors. Ridiculous share prices should keep you away from Research In Motion
The second camp is swiftly headed for bankruptcy and/or total annihilation. We all need to fly occasionally, but airlines file for Chapter 11 protection like Elizabeth Taylor files for divorce -- early and often. You could have seen Movie Gallery's demise from three Netflix
The worst of both worlds
Vonage manages to straddle the fence between these extreme cases. The stock may live in penny-land, but you're still overpaying for what you get on any reasonable valuation basis. Since Vonage has negative earnings and EBITDA, certain ratios like P/E and enterprise value-to-EBITDA are useless. If you want to factor in hypergrowth, let me point out that the company has hit a brick wall. In 2006, sales grew by 125%, giving Vonage an excuse for generous valuations. Last year? A paltry 36.4%.
The company has bled at least $230 million in negative free cash flow in each of the past three years, and $215 million in the past 12 months. That's a problem when you have only around $148 million in cash equivalents on the balance sheet. Will the next round of desperation financing come from secondary stock offerings, diluting whatever value is left in current owners' portfolios? Or will the company take on fresh debt in this economic climate of hesitant banks and low liquidity? The interest rates would be enormous, given Vonage's uninspiring cash flow history.
Where's the nearest fire hydrant?
I was a Vonage customer for several years, leaving only because Verizon
But I'm not going back, not even if Vonage reimburses me for breaking my lifetime (OK, two-year) contract with the phone company. I'd hate to make the switch, then see Vonage go down in a firestorm of lawsuits, competition, stalled growth, and tsunamis of red ink. At least I can count on my current service to be there for the foreseeable future. That's also why you shouldn't buy Vonage stock.
The bottom (phone) line
If you bought Vonage stock at the IPO two years ago, you have my sincere condolences. Those shares are now worth about 11% of what you paid for them. Unfortunately, that's still more than what the business is worth. Verizon, Sprint Nextel
Fool contributor Anders Bylund owns Netflix stock but holds no other position in any of the companies discussed here. He breifly considered shorting Movie Gallery back in 2004, and still regrets not pulling that trigger. You can check out Anders' holdings if you like, and Foolish disclosure knows when to back away from a ticking time bomb.
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