A lot of people often hear the saying "When you love its products, you should buy the stock." I don’t think this is a good idea. Loving the products might be the reason you dig deeper into the company to see whether it represent an investment opportunity or not. Of course, if you love the products and the stock looks so compelling, it’s a great combination. magicJackPlus, a product of magicJack VocalTec (NASDAQ: CALL), is a one such product that a lot of my friends around the world love, because it allows users to call to the US and Canada for free. Recently, the company raised its Q4 outlook. Let’s dig deeper to see whether or not magicJack could offer some “magic” to investors.
magicJack, the Israeli company, is a cloud communication company that provides VoIP, the softphone, and other magicJack products. The company said that its products and services allow users to call for free to the US and Canada. In addition, it is also the owner of different companies in related operating fields, including a microprocessor chip design company, a softphone company, an app server, and session border controller company. The majority of its revenue came from the sales of magicJack and magicJack Plus, at around $44.55 million, accounting for more than 40.3% of the total revenue in 2011. The second largest revenue source was license renewals, bringing in $36.55 million, representing around 33% of total sales. More than 90% of the total revenue derived from the US. The magicJack devices were manufactured and assembled in China.
Raising Outlook on Non-Leveraged Operation
Recently, magicJack raised its outlook for Q4 and full year 2012. It expected to deliver $0.70 per share in EPS, due to lower telecom expenses, higher revenue, and marketing and legal expenses. Interestingly, magicJack didn’t employ high leverage levels, but it had negative equity. As of September 2012, it booked negative $35 million in total stockholders’ equity, no interest-bearing debts, and $34 million in cash. The negative equity was due to the negative retained earnings and increasing treasury stock amount. In the liabilities, the biggest item was deferred revenue, at $54 million. The company also highlighted that the deferred revenue liabilities are not cash liabilities. It would require only small cash outlay, asmagicJack’s ability to generate cash is quite decent.
New Chief is a Good Sign
In addition, magicJack announced the replacement of its founder, Dan Borislow, with the new CEO Gerald Vento, effective the first day in 2013. Vento has spent quite a long time in the telecom industry. He was the founder of TeleCorp PCS, a public wireless services company, and eventually sold his company to AT&T (NYSE: T) in 2002 for a price tag of $5.7 billion. Donald Burns, who is also very experienced in the telecom industry, would be the chairman.Borislow commented: “I am more of a startup and invention guy; Jerry and Don have the ability and the track record running successful public companies." Right after the event, the shares jumped more than 10% to $17.95 per share.
Compared to its peers, including AT&T and Vonage Holdings (NYSE: VG), magicJack seems to be the most expensive, with more than 12.6x EV/EBITDA valuation. Vonage Holdings is the cheapest, with EV multiples of only 3.9x. AT&T is valued at 7.12x EV/EBITDA. However, trailing twelve months, magicJack delivered the highest operating margin of 15%, whereas the operating margins of AT&T and Vonage Holdings were 13% and 11%, respectively. Furthermore, magicJack seems to be expensive in terms of EV multiples only, but it is the cheapest when factoring in its growth. It is currently valued at only 0.54x PEG, whereas AT&T and Vonage Holdings had their PEGs of 2.18x and 1.53x, respectively.
Foolish Bottom Line
With only 0.54x P/E growth ratio, magicJack seems to be a decent growth play for investors. Its products are quite convenient and unique for users. However, in this technology VoIP field, things could change quite quickly. magicJack could be quite vulnerable to more severe direct competition in the near future.