Vonage Has 'Strong Cross-Selling' Opportunities, Analysts Say

 | Oct 27, 2016 | 3:01 PM EDT
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As it turns out, management and investors weren't the only ones impressed with Vonage Holdings' (VG) third-quarter results. Some analysts are now taking action following the solid report.

Oppenheimer's analyst team of Timothy Horan and Ray McDonough raised their price target on the shares by $1 to $8, while maintaining their "Outperform" rating. The analysts said in a research note late Wednesday that the price target hike "assumes accelerating growth driven by the Nexmo acquisition and EBITDA margin expansion after 2018 to 19% by 2020." (EBITDA is a standard valuation metric that stands for earnings before interest, taxes, depreciation and amortization.)

Shares were rising 1% during midday trading Thursday, to around $7.14. The movement follows substantial gains on Wednesday, when the stock jumped by as much as 17%.

The analysts with Oppenheimer said that the business revenues -- excluding the recent Nexmo acquisition -- were solid, with 36,000 new seat adds, which was higher than their estimate of 15,000. Furthermore, with Nexmo's cloud communications platform in the portfolio, there are strong cross-selling opportunities for Vonage.

"VG launched a next-gen voice application interface for [Communications Platform as a Service] and continues to develop value-added services for this platform with strong cross-selling with [Unified Communications as a Service]," Horan and McDonough wrote. (UCaaS refers to a service model where providers deliver telecom or communications software applications or services [think Nexmo], usually through the Web.)

However, they did cite some concerns about gross margins, which they expect to scale as Nexmo does. The Oppenheimer analysts still anticipate stable EBITDA margins in the 15% to 16% range through 2017 on increased research and development and sales expense to capture the "huge" CPaaS opportunity -- which they believe is the right strategy.

"As the company expands its platform functionality, we expect it will be instrumental in expanding the overall market/continue to take its fair share of the UCaas/CPaaS market, resulting in accelerating growth and a sticky customer base," Horan and McDonough wrote.

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