CAPScall of the Week: magicJack VocalTec

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at magicJack VocalTec (NAS: CALL) .

What magicJack VocalTec does
magicJack VocalTec offers low-cost voice-over-Internet phone service through its magicJack and magicJack Plus line of products. Chances are you've seen the commercials on your TV late at night, but the main selling point of its newer and upgraded magicJack Plus is that users can now utilize their phone even when their computer is off or on standby, and can take the product with them for on-the-go use with Wi-Fi networks.

magicJack recently cited strong device demand as the reason it boosted its second-quarter and full-year sales and EPS forecast. The company now expects EPS of $1.50 to $1.80 on sales growth of 25% to 40%, up dramatically from its previous guidance of $1.25 to $1.70 on sales growth of 20% to 30%.

Whom it competes against
magicJack's primary competitor is Vonage (NYS: VG) in low-cost Internet telephony. Vonage has had a lot more time to establish itself, and, as such, generated almost eight times as much in sales as magicJack in 2011.

However, that gap is closing as Vonage's sales are forecast to fall by low-to-mid single digits and magicJack's are rising by a range of 25% to 40%. Earlier in the year Vonage forecast a considerable jump in capital spending, which drove down EBITDA expectations, much to the dismay of shareholders. The move could pay off in expanding Vonage's geographical reach and move them into the mobile segment, but in the meantime the added spending has been a steep drag on its share price.

Despite its rapid growth, magicJack isn't without its own set of concerns. For one, it's always possible that a fierce fight over low-cost VoIP customers could wind up cannibalizing margins for both Vonage and magicJack. In that case, a much safer play might be 8x8 (NAS: EGHT) , which focuses entirely on enterprise customers -- an area with relatively unmet VoIP needs that also pays a higher rate than residential customers.

magicJack also needs to be concerned with free-to-use domestic competitors. Microsoft's (NAS: MSFT) Skype allows users to make free calls via computer with the only real downside being that a computer must be running to receive the call. Privately held Ooma also offers free calls within the U.S. in high definition, but requires the biggest initial investment (usually $200 to $250 for the box) to get started. In comparison, Vonage and Skype require nothing to get started, and magicJack Plus usually costs between $100 and $169 depending on the options you choose for service.

The call
After reviewing magicJack VocalTec's prospects, I've decided to make a CAPScall of outperform on the company for three reasons.

First, the company is well capitalized, which puts it in what I feel is a better position than its direct rival, Vonage. As of its latest quarter, magicJack had $57.7 million in net cash, or roughly just shy of $3 per share. Second, magicJack has been aggressively seeking out partnerships in order to expand into mobile. During the second-quarter, magicJack launched an app for Apple's (NAS: AAPL) iPhone and iPad and is planning to launch an app for Google's Android OS shortly. Finally, it's just growing faster than its peers. At just 11 times forward earnings and a growth rate of 25% to 40%, I see no reason to believe that it won't head higher despite the long-term price-war concerns with Vonage, Skype, and Ooma.

You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.

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Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of Microsoft, Apple, and Google.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Apple, and Google, as well as creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policythat believes transparency is priceless.

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