Telecommunications provider Vonage (VG) hasn't gotten any love from Wall Street since I proclaimed my unusual affinity (for a value investor) for both the company's stock and its phone service back in November.
VG's shares are down more than 20% since then, making fellow Real Money columnists Jim Cramer and Tim Melvin (who both took a pass on the stock) look like winners so far. But in my view, it's only fair for me to acknowledge when ideas haven't worked if I'm going to trumpet up my successes.
Vonage's declines have come amid a volatile market that's seen the Russell 2000 Growth Index fall about 13% during the past three months. But the fact that VG has dropped more than this index (despite little or no negative news) isn't all that surprising. After all, Vonage is a speculative name in a very competitive market, and the company still has much to prove.
I bought VG some 18 months ago at around $3.75 a share vs. the stock's current price of about $5.10. It's doubtful I would have taken the position had it not been for the fact that my business uses Vonage service. That's been a great experience over the past two years, as VG has cut my firm's costs while providing useful bells and whistles that increase productivity.
The company also announced decent fourth-quarter results two weeks ago, marginally beating analyst expectations. VG's $230.1 million of revenues came in $1 million ahead of estimates, while its $0.06 earnings per share bested consensus estimates by a penny.
One particular bright spot for the quarter involved VG's Vonage Business unit, where revenues shot up to $71 million from just $29 million a year ago. The small-business segment is where VG has its greatest opportunities.
Vonage's balance sheet also remains fairly solid. The firm ended the year with about $67 million in cash and short-term marketable securities vs. $218 million in debt.
Lastly, the stock currently trades at just under 9x EV/EBITDA (enterprise value vs. earnings before interest, taxes, depreciation and amortization). It's also going for around 17x Vonage's 2016 consensus earnings estimate. Neither of these ratios seems unreasonable to me, especially for a company that has considerable growth potential.
Of course, one of the knocks against Vonage is that it's a small fish playing in a big pond. As such, I expect the stock to remain volatile. But I'm mindful of the fact that I personally chose this "small fish" for my own business -- and I'm confident that many other small firms will do the same in the future.