Citigroup Analyst Sticks 'Sell' on Vonage
The research department of one of Vonage Holdings Corp. (NYSE: VG)'s IPO underwriters has slapped the company's stock with a Sell rating.
In a research brief sent to investors Tuesday, Citibank analyst Michael Rollins writes that Vonage may be headed for "a financial restructuring or bankruptcy in the 2008 or 2009 timeframe" if it doesn't prevail in its patent lawsuit fight with Verizon. He downgraded the stock from Hold. (See Vonage, Verizon Fight to Go Into Late Rounds.)
The investment banking side of Citigroup led the IPO underwriting with Deutsche Bank AG and UBS AG . The research department at Deutsche Bank initiated coverage of Vonage stock in August 2006 and has kept its Hold rating. The research team at UBS initiated coverage a month earlier and has stayed with Neutral.
But Vonage bankrupt? In 2009? Is it really that bad?
"It's really that bad, and it could even be worse," says Stanford Financial Group analyst Clayton Moran. If Vonage isn't granted a stay on the injunction slapped on it in its patent fight with Verizon, Moran says the company might have to shut down operations sooner than later. Moran says he believes Vonage will probably get its stay.
Still Vonage has a costly appeals court fight ahead of it, not to mention the $58 million plus royalties it'll pay Verizon if it loses. Meanwhile, Moran says, Vonage continues to burn cash.
"We estimate they will burn $160 million this year," Moran says. Vonage also has debt of $250 million that will come due in 2008, Moran points out. "So their financial situation is shaky, and they could face a significant cash crunch in 2008."
Citigroup's Rollins has had his doubts about Vonage from the beginning. He wrote in a brief last July that post-IPO shareholder suits made owning the stock a risky business. (See Regulators, Lawyers Swarm Vonage and Vonage Class Action: What's the Damage? )
Vonage shares were trading up $0.06 (1.84%) to $3.32 early Wednesday afternoon.
— Mark Sullivan, Reporter, Light Reading