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Vonage Shares Surge On Hopes for VoIP Growth

Reuters
Wednesday, 26 Aug 2009 | 6:30 PM ET

Vonage Holdings Corp. shares surged more than 35 percent on Wednesday on growing views that the company would survive despite earlier skepticism over its business model.

Vonage
Vonage

The stock has now climbed more than 300 percent in the past week, a rally that has surprised analysts who say the company still faces stiff competition and weak revenue. Last week, the stock was trading at less than 50 cents a share, but it now stands above $2.

Vanessa Alvarez, analyst at Frost & Sullivan, said news of Google Inc.'s new voice application may be renewing interest in VoIP, or voice-over-Internet Protocol, a technology that Vonage pioneered.

Vonage was among the first to offer Internet-based calling services to people looking for cheaper alternatives to regular phone lines.

Since its inception, the company has struggled with high costs and competition from traditional phone and cable operators that now offer bundled video, Internet and phone services. It is also challenged by Skype, a unit of online auction company eBay Inc. and other Internet-based services.

While it posted its first-ever quarterly net profit earlier this month, less marketing and a weaker economy resulted in fewer subscribers. The drop in subscribers, analysts have said, suggests that Vonage might not be viable as a stand-alone company.

Alvarez said recent news concerning Google's Voice application, widely seen as bringing more competition to the wireless phone industry, had piqued interest in the potential for VoIP services like Vonage to integrate its services into mobile phones.

"It's really riding on the coattails of Google Voice and the whole phenomenon of free voice," she said.

While the increasing variety of services may result in more rivals, she said, investors may be focused more on the upside for Vonage.

"It does mean more competition but that's healthy. Vonage can now say we're in a space that's pretty hot, pretty happening," she said.

Vonage shares were up 56 cents at $2.15 by early afternoon and briefly touched a high of $2.62, a level not seen since November 2007.

The shares, however, are still far below their May 2006 market debut at $17.

Alvarez said renewed interest in VoIP could also mean potential bids from larger communications service providers or equipment makers looking to integrate Vonage's technology or customer base.

"If the company's smart they'll take advantage of this, do the restructuring needed, and outline a road map," she said, adding it should look for a "larger platform to ingrate into."

She said: "Those kinds of moves for Vonage would be pretty critical, to be able to move away from being a stand-alonecompany and be part of an ecosystem...and really spread their wings."

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