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VOIP Stocks: How High?

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News Analysis
Light Reading
12/4/2003
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Investors and Wall Street analysts packed into The Harvard Club in New York on Wednesday, eager to dissect the latest trends in the newly hot voice-over-IP (VOIP) market and determine whether frothy shares are deserving of more attention.

The event -- “VOIP as a Driver for Telecommunications Growth” -- was hosted by the New York Society of Security Analysts and attended by well over 200 people. Vendor pitches came thick and fast from VOIP service providers 8x8 Inc. (Nasdaq: EGHT) and iBasis Inc. (OTC: IBAS) and VOIP equipment providers VocalTec Communications Ltd., I-Sector Corp., Cbeyond Communications and Xten Networks Inc., among others.

The big question to surface in the Q&A session: What’s the business model and how does a company make money at this?

Investors seem wary of the new VOIP service providers attempting to compete with incumbents like Verizon Communications Inc. (NYSE: VZ) and AT&T Corp. (NYSE: T) using an “all you can eat” approach to selling phone calls over the Internet.

“There’s no value in competing on price; the incumbents can keep driving prices lower and customers will switch from one carrier to the next… It’s a bad model,” says Clemence Garcia, analyst at GE Asset Management.

Huw Rees, VP of marketing at 8x8 admits the challenge for his company and others like it is to add value to their existing service and not compete on price alone. “This is our focus for next year,” he says.

Among all the standalone VOIP providers, 8x8 shares are the rockets du jour. Earlier this year its shares were floundering at around 17 cents, then picked up to 50 cents as recently as August. Yet in the past couple of months the stock has broken out of penny-stock land and today is changing hands for almost $6 a share. The shares closed last Friday at a yearly high of $7.52, but they've sold off this week.

At last Friday's price, the shares had gained more than 4,000 percent from the bottom, and they recently traded at at market capitalization near $200 million. Not bad for a company with 53 employees and revenues of $11 million.

Investors are chasing other stocks in the same sector. Check out the table below, which includes a snapshot of the market caps and price-to-sales ratios of a handful of companies in the same market.

Table 1: VOIP Stock Shock

VOIP Stock Market Capitalization TTM Revenue P/S Ratio Profitable
ITXC (ITXC) $183 Million $268.38M 0.5x No
iBasis (IBAS.OB) $86.55 Million $164.94M 0.5x No
Net2Phone (NTOP) $355.09 Million $91.75M 4x No
DeltaThree (DDDC) $109.83 Million $12.93M 8x No
8x8 (EGHT) $178.6 Million $11M 19x No
Sonus (SONS) $2.17 Billion $62.56M 28.4x Q3 only
Source: Multex.com


Even though the skeptics say the trend is reminiscent of bubble-like activity, there's no reason to think the momentum can't carry the stocks further.

Some analysts are upbeat about the surge of interest in these stocks, despite the gold-rush mentality surrounding them. “I’m a bull on this stuff. Where can a little company go with a price of a few cents, apart from up?” asks an analyst with Senvest International LLC who asked not to be named. "The telecom market has been dead for so long, people are looking for the next hot stock to revive it, and VOIP is it."

— Jo Maitland, Senior Editor, Boardwatch

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firstmiler
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firstmiler,
User Rank: Light Beer
12/4/2012 | 11:12:09 PM
re: VOIP Stocks: How High?
After at least a year of doom/gloom, is it just me or is anyone else beginning to see a glimmer of light on the horizon? Investors' check books awakening from their years long coma to open up and bring forth capitalization fruit, business models starting to pencil out, service providers seeing reason to invest, consumers showing excitement about the value of new services.... one may get to thinking we have a new bull market or sump'n.
technonerd
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technonerd,
User Rank: Light Beer
12/4/2012 | 11:12:01 PM
re: VOIP Stocks: How High?
Sounds like there's a new flock of sheep to be sheared. Or maybe the same sheep need another shearing, the wool having grown back over their eyes.

"The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun."
-Ecc. 1:9
BobbyMax
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BobbyMax,
User Rank: Light Beer
12/4/2012 | 11:11:52 PM
re: VOIP Stocks: How High?
VOIP is a tecnology suitable for Third World Countries, This technology is very defective as it does not meet the quality standards. The traditional circuit switched and packet switched technologies are not replacable by VOIP. The VOIP is promoted by vendors who have assembled voip equipment like media gateways and softswitches. There is no need for VOIP as the traditional methods of providing voice sevices are very very inexpensive.
Flower
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Flower,
User Rank: Light Beer
12/4/2012 | 11:11:51 PM
re: VOIP Stocks: How High?
"....he traditional methods of providing voice sevices are very very inexpensive".

They are also complete controlled by a limited number of companies. Monopoly, kartel, whatever, if the traditional methods are so inexpensive, how come I pay 25 eurocents or more to send a handfull of bytes per SMS ? Pure theft, imho.

Quality of voice service is ABSOLUTELY not important to the majority of customers. GSM is proof for that. Maybe you yanks are not aware, but GSM is ubiquitous in most european countries. Just this week I read that a survey in my country revealed that the number of 9-year old boys with a cellphone (*nine* year old) increased from 45% in 2002 to 70% in 2003. 57% of 9-year old girls now have a cellphone.
Sound quality of GSM can be pretty bad. Availability in some areas is pretty bad. Still EVERYBODY has a cellphone, and everybody pays through their noses for that service.

IMHO, what needs to be build is gadget that:
- consists of 2 things: a basestation with cables and a wireless phone
- the wireless phone can talk to the basestation if it is nearby
- if the wireless phone can't contact the basestation (distance), it acts as a regular cellphone
- if the wireless phone can contact the basestation, calls will be routed through the basestation
- the basestation is connected to POTS *and* to the Internet (via ADSL or cable or whatever)
- if the basestation can contact the target via VoIP over the Internet, that method is preferred
- if the basestation can not contact the target via VoIP, it will use POTS

This should all be done automatically. Calls will go via the cheapest way (assuming cost of VoIP < POTS < GSM). You can use one handset for use both at home and on the road.

Would this be difficult or expensive to make ? It shouldn't be more expensive than the cost of a regular cellphone. Why can't I buy one now ? Are vendors of cellphones and other equipment working together with phonecompanies to keep VoIP out ? I'm wondering. If I can come up with this idea, I am sure I am not the only one ....

POTS is dead, and you know it.
technonerd
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technonerd,
User Rank: Light Beer
12/4/2012 | 11:11:51 PM
re: VOIP Stocks: How High?
They are also complete controlled by a limited number of companies. Monopoly, kartel, whatever, if the traditional methods are so inexpensive, how come I pay 25 eurocents or more to send a handfull of bytes per SMS ? Pure theft, imho.
You pay as much as you do for an SMS because the government in Europe allow the providers to charge this much. Prices for telecom services have to finance not only the costs of providing the service in question but the costs of maintaining and expanding the network + whatever profit will be allowed.

Anyone who thinks the very same formula doesn't apply to VoIP is dreaming.


Quality of voice service is ABSOLUTELY not important to the majority of customers. GSM is proof for that.
Intelligibility and fidelity of the sound is something that consumers are willing to trade for convenience, i.e., mobility. Whether they're willing to trade it for price is another issue; I suspect they'll do so, but only for significant discounts.


Maybe you yanks are not aware, but GSM is ubiquitous in most european countries.
Yes, we know.


Sound quality of GSM can be pretty bad. Availability in some areas is pretty bad. Still EVERYBODY has a cellphone, and everybody pays through their noses for that service.
That's because they value mobility over sound quality.


IMHO, what needs to be build is gadget that:
Your list was so convoluted that I snipped it as an act of mercy. You need to look at CellSocket (www.cellsocket.com). It is a wireless NID although that's not what they call it because wisely the company is a consumer products outfit than a technology vendor.

CellSocket routes in-home wireline traffic to and from the cellular network. It solves reception issues with an augmented antenna. It allows a customer to disconnect his wireline service -- both local and long-distance -- and save $40-$50 a month.

This product still needs tweaks, such as ability to handle faxes and dialup Internet + better handling of Caller I.D. data. At $140, it's still too expensive. But it's only the first generation; within 2-3 years there will be lots of competition and these things will cost $50.

When (not if, but when) this happens, residential wireline service will go the way of the dodo bird. I think the process will be well along the way within five years.


Calls will go via the cheapest way (assuming cost of VoIP < POTS < GSM). You can use one handset for use both at home and on the road.
There are many flaws with your plan.

1. It requires the user to have broadband + POTS + cellular. Combined, the charges are roughly $120 a month, give or take some. And this is going to save money?

2. People don't want to use "the same handset" on the road and at home. Cellular handsets make lousy home phones. They're too small. They are easily misplaced and, among other things, you can't cradle a cellphone between your shoulder and your ear while you're washing the dog or cooking dinner. If you think people are going to carry a headset around the house in case they should get or make a call, you're way off on Planet Z.

Are vendors of cellphones and other equipment working together with phonecompanies to keep VoIP out?
Nope. The problem with VoIP is that, in the mass market, it's a technology in search of an application. POTS, whether it's wireline or cellular, is better and cheaper for voice.


POTS is dead, and you know it.
50 years from now, POTS will continue to dominate voice telecommunications.
technonerd
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technonerd,
User Rank: Light Beer
12/4/2012 | 11:11:51 PM
re: VOIP Stocks: How High?
The VOIP is promoted by vendors who have assembled voip equipment like media gateways and softswitches. There is no need for VOIP as the traditional methods of providing voice sevices are very very inexpensive.
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