Fellow value investors may cringe, and even revoke my membership from the value club when they find out that there's been a small VoIP (Voice over Internet Protocol) name in my portfolio for the past year and a half.
It all started innocently enough when the monthly Verizon (VZ) bill for my business got out of hand, again. It seemed as though every year the same thing happened, and I'd be on the horn with Verizon (never fun, and always frustrating) trying to negotiate a lower rate. Last year, that was to no avail.
Simultaneously, I began seeing the very annoying Vonage (VG) TV commercials that featured a straggly haired bearded dude, who looked like he came right out of the GEICO caveman commercials. He was pitching Vonage's residential services, but there was no mention of small business services.
I called them anyway. Little did I know at the time that the company had recently purchased Vocalocity, which had 23,000 small business customers, for $130 million. Verizon could not come through, so I made the switch to VoIP.
The move to Vonage cut my businesses phone bill by nearly 60%, and that included a whole bunch of very useful features not included (or offered) by Verizon. These included voice mail to email transcription, simultaneous ringing of several phones, a virtual receptionist, and other features that have been beneficial to my business.
A review of the fundamentals was somewhat surprising. While the company was loaded with intangible assets, putting the tangible book value on the low side, it was not encumbered with the levels of debt I'd expected. There was also a healthy amount of cash. The company was also profitable, revenues were growing moderately, and given the foray into the small business markets, along with my experience as a small business owner, I believed it was on to something.
So far, Vonage has been a big winner, both as an investment, and as a small business solution. The shares are up more than 76% since I took a position, and I have never once missed Verizon.
A couple of acquisitions later (Telesphere last November and cloud communications company Simple Signal earlier this year), and Vonage is expanding its reach in the small to mid-sized business market.
Vonage currently trades at about 19x trailing adjusted earnings, and 22x 2016 consensus earnings estimates. The company ended the latest quarter with $70 million in cash and short-term investments, and $253 million in debt.
Fellow Real Money columnist and value aficionado Tim Melvin wrote about Vonage in early June, when it appeared on one of the Value Line screens he follows. Not surprisingly, Melvin passed on Vonage not just on the fundamentals, but also because he'd never heard of anyone that was happy with the service. Now he does. Interestingly, our own Jim Cramer revealed in late October that he was not tempted by Vonage, either. It's an interesting conundrum when both Melvin and Cramer dislike the same name.
Hmmm. Stay tuned