Tuesday, August 25, 2009

Why is Vonage up 500% in 5 days?!

As I begin this, Vonage is trading at over $2.40 in the aftermarket.

Vonage was trading below $.40 just five days ago.

The (investment) world is looking for an explanation. Barron's tech writers have been blogging frequently over the past few days, marveling at the huge move. The Yahoo! message boards are abuzz.

To me, this looks like a euphorically-driven chain reaction.

A short squeeze might have triggered this rally, but it isn't responsible for the majority of today's move. According to Yahoo! Finance, around the end of July, there were 4 million shares sold short. 41 million VG shares traded today, so short covering can't be credited with this move.

There also hasn't been any significant news within the past few days. VG reported optimistic results in the recent past, and they also announced a new international phone service last week. Vonage's comment on the situation seems to imply that the entire world just realized these couple tidbits and all tried to enter at once. I'm not buying that. I think that's the equivalent of saying "we have no idea why our stock is up 500% in a week, but we're just as estatic about it as you are!"

So my conclusion is that this is a euphoric rally driven by people going long. Owners at $.40 (who may have been underwater from previous purchases) probably aren't selling into strength, driving price even higher. Coverage in the media likely attracts new investors to this hot stock.

VG has been prone to such explosive moves; I was lucky enough to own it in the past prior to a positive announcement; shares jumped 100%.

Buying (or shorting) VG today or tomorrow is simply gambling. Without a clear driver of this extreme movement, there's no concrete reason why shares are worth so much more today than they were last week. At the same time, shorting against such powerful upward movement is insane. Three times during the day today, VG moved up over $.20 (representing 20+% moves) in mere minutes. That's not the kind of momentum I'd want to be shorting into.

This is certainly an interesting story, and it'll be interesting to see how and where things settle down. Stay tuned.





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12 comments:

Vishal said...

very poor analysis. there's an obvious reason for the tremendous increase, and that is them making calls to india, china, mexico free. that's a development this weekend:

http://www.reuters.com/article/rbssTechMediaTelecomNews/idUSN1947397120090819

"Starting Thursday, the service will be expanded to include countries like India, China and Mexico, among dozens of others."

whether or not such an increase is warranted is a totally different discussion, but at least there's a solid reason. which you missed completely.

Stephen Frankola said...

That was mentioned in the article... but why would someone pay with Vonage to make that international call instead of using Skype for free?

Geraldine said...

sitting in front of your computer is a little annoying I'd say. I'd take phone conversation to skype anyday, but alas I use Skype because it is free...

crazy crazy moves.
I remember trading this from .40 -.50 and thinking myself great.. look at this monster now!

Mary said...

Anyone would agree that Vonage's new world calling plan is not a solid reason for a 186% price increase in one day. Plus, that announcement was made on Thursday of last week. The jump occurred today. So as far as the investment community is concerned that is already old news and has no bearings on today's movement. And why would people bet on a plan like that which only serves to raise Vonage's cost of operation? They have already been losing subscribers and the company has literally been a dead man walking for quite some time now. Maybe the execs are poising the company for a buyout. Who knows? I've been researching this anomaly for the past few hours and there are a lot of things here that don't add up. If you are holding this stock, I highly recommend selling it before the market opens tomorrow and the SEC starts playing cop.

Frazier said...

Why use Vonage when I can use Magic Jack and not have to sit in front of a computer?

Mahesh said...

Stephen, Frazier,

There is a big difference in international calling. When most people in poor countries cannot afford broadband, let alone a computer, making calls to a regular/cell phone is an absolute necessity. Both for Skype and Magic Jack to work, you need a descent broadband connection. For both, calling to internationalize numbers cost additional money.

If you look at Vonage and Packet8, you can have your Vonage/Packet8 here and call regular numbers in other countries. Now that Vonage makes free international calls as part of their plan, this is a huge plus for many immigrants. Why pay even 20c a min to call some of these countries when you can call all you want for the price of the regular monthly bill?

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katrina said...

why did you stop writing?

Brian said...

Agreed ^ should continue writing..

Kate said...

Ya Stephen why did you stop writing!??? I just found this today!

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