Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Vonage (NYS: VG) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Vonage.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Vonage in 2010, the company has seen its score rise by three points. Gains in earnings and revenue growth as well as a cleaner balance sheet have helped the company along, but the stock's 10% drop over the past year isn't giving shareholders good reception.
Vonage has been around for a long time, but technology trends have finally caught up with the voice-over-Internet-protocol pioneer. As cloud telephony gains in popularity and attractiveness, Vonage has finally come into its own as a widely recognized method for getting voice service.
The problem, though, is that Vonage has competition, and even worse, those competitors are succeeding where Vonage is still struggling. On the consumer side, VocalTec Communications (NAS: CALL) and its MagicJack service has severely undercut Vonage on the price side. Meanwhile, 8x8 (NAS: EGHT) has set its sights on the business community, where higher margins are possible.
Moreover, voice by itself isn't much of a selling point anymore. Microsoft's (NAS: MSFT) Skype service provides video along with voice from anywhere in the world, and Skype-to-Skype communication is free. Apple's (NAS: AAPL) FaceTime is also an easy video-call service for those who own Apple's mobile devices, and with most smartphone service plans moving to unlimited calling, Vonage is being left to serve low-end customers.
For Vonage to improve, it really needs to identify a more lucrative niche of customers to serve. If it can't do that, then it's not likely to get much closer to perfection anytime soon.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Vonage's growth is limited, but Apple's seems limitless. Learn more about the iPhone maker in the Fool's premium report on Apple. It'll definitely get you better connected to what's happening with the soaring tech company. Click here and get your copy today.
Click here to add Vonage to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Has Vonage Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple, as well as creating a bull call spread position in Apple and a synthetic covered call position in Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.