To give credit where it's due, magicJack VocalTec Ltd (NASDAQ:CALL) was once one of the market's hottest stocks, and rightfully so. The company made a unique and highly marketable product, and consumers embraced the living daylights out of it. That's what caused shares of CALL to soar - and this isn't a misprint - more than 5000% between late-2008 and late-2012. It was even one of the SmallCap Network's featured stocks for a while back in 2012; the growth story was just that compelling.
This isn't 2012 though, and the future that magicJack VocalTec is facing now isn't as bright as the one that it seemed to be facing then. Ditto for the stock, which at one point was up more than 100% for the 2014. Though CALL has since pulled back by about 25% from its March peak, the current price of $19.26 (and the subsequent market cap of $350 million) still seems to be overstating the company's foreseeable potential. Why? Two key reasons.
First, and perhaps foremost, the number of device users fell sequentially in the most recently completed fiscal quarter, from 3.3 million to 3.2 million. That in itself isn't alarming per se; growth for any company can ebb and flow in the short run, especially when the product line is forever going through changes... upgrades, to be specific. What's alarming is that the headcount of active users fell to 3.3 million in Q3 from Q2's (2013) 3.36 million. That 3.36 million was admittedly up from Q1's 3.27 million active users, but still, considering the company lost ground in terms of users in the past two quarters and in the quarter prior to those two quarters it only saw anemic growth (despite the fact that magicJack PLUS launched in June of last year) it's clear that demand is deteriorating with no apparent way to stop it.
The second reason CALL shares may still be overvalued: Renewal rates were only 40% last quarter. Granted, that was a stronger renewal rate than the average renewal rate of 28% seen in 2012. It's still not strong enough to take the pressure o! ff of device revenue, however. If device sales - even those purchased only so owners could gain access to the mobile app - hit the wall they're likely to hit (more on that in a second), the company's revenue will suffer, as the bulk of it comes from device sales rather than providing the service. Remember, the number of active users still fell last quarter, even with higher retention.
Be that as it may, magicJack VocalTec Ltd may have bigger challenges than are apparent with a mere look at the accounting statements.
The recent $19 billion acquisition of mobile messaging service WhatsApp by Facebook Inc. (NASDAQ:FB) sparked some dreams of a similar valuation for magicJack VocalTec, with or without an acquisition. The euphoria may not have been felt by anyone more than current CALL CEO Gerald Vento, who made a point of making the comparison in Q4's conference call.
And from a cursory point of view, it's not a completely meaningless comparison. Whatsapp connects fellow users of Whatsapp, allowing them to send text messages, photos, and even audio messages between one another. MagicJack doesn't do any of that, but it perhaps does one thing better - it allows real-time voice-to-voice (VOIP) chat between fellow magicJack app users, in addition to anyone with a phone. If Whatsapp's 450 million users (and the 1 million it adds each day) is worth $19 billion, surely magicJack's 6.9 million app users (3.3 million of which used the service in the past 30 days) alone are worth much more than the company's current market cap of $350 million would suggest.
The problem is, the at that market cap, magicJack's 6.9 million users are already valued at $50 a piece... 20% higher than the crazy premium just paid per user ($42) of WhatsApp. If anything, even if CALL could command the same ridiculous pirce per user, the stock's still arguably 20% overvalued.
But a paying voice customer is worth more than user of a free text and photo delivery service? There's just one problem with the theory about the value of a voice customer... it's not accurate. Gartner's consumer technologies research director Brian Blau said it as plainly as could be in an interview last month: "MagicJack has a significant number of active app users, but not enough to attract a bidder...It needs to break into the mobile application business because the value of voice services is declining across the industry, threatening its niche as a low-cost provider over the next 5 to 10 years."
Translation: Not only are voice customers not worth as much as they used to be, they may actually be worth less than the $42 a piece that Facbook just paid Whatsapp for non-voice user. That being said...
Best Defense Companies To Watch In Right Now
While magicJack is getting deeper into the application waters that Blau said was necessary, it may be too little, too late.
Having never taken a commanding lead in the app space when it was still fragmented a couple of years ago, magicJack VocalTec gave Skype, Viber (mobile wi-fi calling), Facebook, and WeChat (video calls) time and room to pitch their tent in the same mobile, wi-fi-capable telephony space. While magicJack may have one of the more recognizable names in the business, Facebook has a stunning 1 billion users, Viber has 100 million users, Skype has 300 million users (though no details on its mobile users), and WeChat has 350 million users. Any and all of these VOICE-capable companies can use their size and scale in a way that magicJack simply can't.
To be fair, no two of these choices are exactly alike, and a particular individual could find the magicJack app meets their unique need. By and large though, magicJack VocalTec is facing enormous competition on the same basic front, and is unlikely to be able to make ! a dent in any of it.
It gets worse. With rumors that Whatsapp will be adding voice capabilities later this year, the need for the (paid) magicJack service is further diminished.
It gets even worse than that. Though this has not been tested and verified by the SmallCap Network editorial staff (the test is forthcoming), the buzz is that the new magicjack app for Android that's supposed to make free wi-fi calls from a web-enabled phone doesn't actually use a wi-fi connection. Instead, though it appears as if a user is instructing the app to connect to another user outside of that phone's cellular connection technology, in reality, it's still routing that call as if it were a normal cell phone call, using the cell minutes it wasn't supposed to use, defeating the purpose of the app in the first place.
While verification of magicapp's error is pending, in the grand scheme of things it doesn't matter. MagicJack VocalTec Ltd has a mountain of other factors working against it, with no amount of strategizing that could foreseeably sidestep the oncoming freight train. Anyone who owns CALL should be worried here, and should be wondering if the bulk of the first quarter's rally was mostly a short-covering rally. The company itself has actually done little that will improve its marketing firepower anytime soon, and it just doesn't have the size it needs to muscle its way into any more market share when the Skypes and Facebooks out there are bearing down with highly comparable apps and services.
For more trading ideas and insights like these, be sure to sign up for the free SmallCap Network newsletter. You'll get stock picks, market calls, and more, every day. Here's what you've missed recently.
No comments:
Post a Comment