Optical/IP Networks

VOIP Stocks: How High?

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

Sign In