Hanging Up on Vonage

WallStreetJournalonline.com

May 24, 2006

10:20 a.m.: This is kind of like puncturing one of the racer's tires before the green flag even waves. This morning, after telecom provider Vonage Holdings priced its initial public offering at $17 a share, a small research firm named Soleil SurTerre Research started coverage of the company with a "hold" rating and a $16 price target. "We are concerned about the level of competition in the voice telecom business and believe that the stock is pretty close to fairly valued at this level," wrote analyst Todd Rethemeier.

The company priced 31.25 million shares, giving it a market capitalization of $3.2 billion, but Mr. Rethemeier states that the wireless sector's competition and potential slowing in subscriber growth worry long-term investors. The company has experienced massive customer and revenue growth since it first launched its Internet calling service in October 2002, but it isn't profitable, and Mr. Rethemeier estimates that it will continue to report losses through 2008.

Francis Gaskins, president of research firm Ipodesktop.com, points out that while the practice isn't common, some research firms will issue ratings on big IPOs shortly after pricing because "it's an easy way to get publicity," but it's not as if he was all that high on the Vonage deal either. Prior to the offering he gave the deal a "C" rating, calling it "public venture capital," and adding that "it could do well, but there's a lot of risk to it." So far, investors aren't impressed -- shares were down 67 cents, or 4%, to 16.33 on the New York Stock Exchange.

Update: Another Soleil company, Soleil CommResearch, started coverage of the company with an "underweight" rating and a $13 target.

--David A. Gaffen

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