Should you invest in Vonage?

Vonage Holdings Corp. (NYSE:VG) shares are at $1.80 and they just scraped by last week on their Q1 earnings call. Vonage has a cult following, both subscribers and investors which is why we care about it.  The stock has already disappointed everyone, yet they still manage to stay in the game like an airline company with one foot out the door.  So do you Vonage or don't you?

Last week, Vonage reported a net loss shrank to $9 million, or 6 cents a share, from $72 million, or 47 cents a share, in the same quarter a year earlier. Revenue rose 15 percent to $225 million, in line with Wall Street expectations.

But it added only 30,000 net subscriber lines in the quarter, a sharp decline from 56,000 additions in the previous quarter and 166,000 in the year-ago period.

However, the big problem with Vonage is debt, Chairman Jeffrey Citron said in an interview he expects a nonbinding letter of intent for a $215 million debt financing that Vonage obtained in April to turn into a formal commitment in the second quarter.

The debt is crucial for Vonage to refinance $253 million in convertible debt redeemable in mid-December. But Stanford Group analyst Clayton Moran said debt terms may not be good, given the troubles in the credit market.

"Given the soft operating results and the strained credit environment, we're afraid the terms will be onerous," Moran said. "It's possible that they won't work out terms with the current financier and turning to another alternative with less time probably won't be much better."

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The next big problem with Vonage is their competition with all the major carriers and eBay's Skype. Cable TV and traditional phone companies that already have relationships with millions of consumers and are well positioned to bundle together TV, Internet access and telephony.

A big problem for Vonage and a host of other alternative providers — such as 8x8 Inc.'s Packet8 and Primus Telecommunications Inc.'s Lingo — is that they piggyback on home broadband connections controlled by other companies.

Unless they strike a deal with broadband providers and others, they can't guarantee time-sensitive voice packets are given priority over other data, such as someone's illegal movie download. That could result in poor call quality.

Masters, Vonage shares are still too expensive when you consider all the risk.  Remember that IPO? Vonage currently claims over 2.5 million subscribers to its VoIP service; the company has been on a rocky path, first rolling out a much-hyped IPO in 2006.  Let the stock fall under the $1 level, then consider it, but until then, stay clear.

SOURCE: Reuters.com, USAToday.com

Disclaimer: No positions in VG.