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May 25, 2006

Vonage IPO – When the Crowd Is Always Wrong

With hindsight, of course, the poor performance of the Vonage IPO was predictable.  For the record, I said I wasn’t buying Vonage stock and complained about Vonage’s voicemail solicitation for customer participation in the IPO, but I DIDN’T predict that the stock price would go down on opening day.  This is called a “busted IPO” although the company and the banks which took them public do get their money.

My posts on Vonage and other negative posts elicited comments and email like this:

“You mention you won't buy because the business will be dead in 5 years. But what about 3 months from now? I mean, why else would you buy stock like this before it hits the public market? ie, buy it now at $17, let the market push it to $40, then sell.. ?”

Andy Kessler suspected that Skype’s free calling in the US and Canada was a blow to the Vonage IPO.   He wrote yesterday:

“Man, did I catch some heat. Almost 50 comments later, lot's of them personal, swearing that the Vonage deal was oversubscribed, telecom execs were begging to get in, institutions were all over it, Skype is for geeks and Vonage is grandmother friendly.”

After all, it’s common wisdom that getting in on an IPO is a sure-fire way to make fast money as long as you flip the stock quickly enough.  This usually works because there usually isn’t enough IPO stock in the hands of potential flippers to counteract post-IPO buying by large funds which want to add to their IPO position (and perhaps protect the price of that position).

But Vonage, according to The New York Times,  made up to 15% of the IPO shares available to its customers.  Apparently many of these customers bought to flip.  Once everybody’s doing it, flipping can’t work.  The stock quickly fell below the IPO price making flipping an unprofitable exercise.  Once the stock broke down, it is quite possible that mutual funds deferred or canceled ant post-IPO buying plans which they had.  I’m actually a little surprised that the stock held up as well as it did given that it was a busted IPO. Sign of future strength or deferred weakness.  I’d bet the latter but I’m not a skilled stock trader.

Everybody CAN’T be right about an investment strategy.  The whole herd can’t win at once because there isn’t anybody around to be a loser.  If everybody flips, everybody loses as we’ve just seen.  I believe in the wisdom of the crowd (usually) when it comes to wikipedia entries or social bookmarking.  Follow it at you own risk when it comes to investing; it will inevitably be wrong.

Om Malik wrote some good fundamental analysis of Vonage here.  If you’re an investor rather than a speculator, that’s what you want to look at.

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