Problem borrowing the stock?

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

I just heard that one of the prime brokers (wall street) just admitted that it is getting very expensive to borrow Vonage stock!

What does this mean?

It means that a sizeable amount of the company float is being shorted on a naked basis. That means that there are firms that have sold the shares (without owning them) and have not been able deliver them to the buyer. They are also finding it difficult to borrow the shares to make delivery. Soon the buyers will have the option of buying the stock in the open market and closing out the initial trade.

The short sellers would love holders of the stock to sell their shares so that they can close out their shorts in a very profitable trade.

Watch the number of shorts carefully, as enough "Fail to Deliver"s could cause the stock to fly as short sellers are forced to buy back their positions.

Posts: 111 · Vonage Forum Senior Joined: Jun 15, 2006 Posts: 111

You do not seem to understand how naked shorting works. A broker NEVER has to deliver, just cover the loss/gain that failing to deliver involves. And naked shorting is almost never 20% of all total shorting.

I have been shorting companies for years, and I am sure many times my shorts have been naked (there is no way for me to know what my broker does). I have NEVER been forced to cover because my position was naked. I have never heard of it happening.

Pinning your hopes on a short squeeze is insane. We smell blood, and will continue to short this until it is below 5. Shorting this company isn't speculation, it is the easiest money since shorting Pets.com. Haven't you felt enough pain yet? Why are you trying to catch a falling knife?

People who thought it hit bottom Friday are down 12%, people who thought it hit bottom Thursday are down 14%, people who thought it hit bottom Wednesday are down 19%....

What makes you think you're so special?

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

You can short a stock and borrow it and there is no problem.

Prime brokers are able to borrow the stock from others holders and the delivery of the stock is made to the buyer and there is no problem.

If the prime brokers cannot borrow the stock, however, and the short seller cannot deliver the stock to the buyer, then there is a big problem. The buyer after a grace period is entitled to go out in the market and buy the stock for himself and charge the seller for any costs. That is when the price can gap.

You can maintain a short as long as you find the stock to borrow. if you cannot borrow, then the buyer is going to cover at any cost. You cannot maintain a "Fail to Deliver" for very long.

if you regularly short stocks,then you better understand what really happens in the backoffice!!

Posts: 111 · Vonage Forum Senior Joined: Jun 15, 2006 Posts: 111

So can you offer up an example of a short squeeze based on covering by naked shorts? Please link to an article discussing the the squeeze.

I thought not.

Also, why do you think there is such interest in shorting Vonage, and not, say Google or Intel or Abercrombie and Fitch?

Could it be that these companies are not obcenely overpriced, run by crooks, and headed toward bankruptcy?

The only other time you ever hear complaints about "naked shorting" is with Overstock, another internet company that never has and never will make any money. They are down 75%, and so far VG is only down 50.5%. Let that be a warning to you.

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

There are many examples of stocks that have short squeezes. Amazon gapped a couple of times because the shorts (and there are many) couldn't borrow the stock.

The stock of Vonage may have been overpriced or it may not have been. We won't know until 3 to 5 years. The question is really how much are 1.6MM (and growing) customers worth.

I think it is unfair to say that management are crooks. They never intended to make a profit in the short run. Their goal is to get as many customers as they can. The markets may be pricing the stock based on profitability measures, but management, the venture capital firms that funded Vonage, and perhaps their potential suitor cares more about the number of customers that they gain.

I do think it is unfair to bring a company to market with this disparity in pricing models. it makes the company's stock very vunerable to the wrath of short sellers etc. it is very easy to speculate that the stock can be worth $17 or $10 or $6 or $20 or $2 when there is no profit. it becomes a guessing game. One thing is for sure, the company will not go bankrupt. They have the cash from the IPO. Also the customer base keeps growing and that is what is valuable when evaluating the stock.

Another factor to be careful about is end of quarter balance sheet issues. Many hedge funds who may have long or short positions in Vonage may want to get rid of their positions before 6/30. Nobody wants to admit having any positions in that stock (long or short).

Also, 7/02/06 is the end of the quiet period. Expect management to start talking about their prospects during the first week in july.

Posts: 66 · Full Forum Member Joined: May 25, 2006 Posts: 66

Quote:

Their goal is to get as many customers as they can. The markets may be pricing the stock based on profitability measures, but management, the venture capital firms that funded Vonage, and perhaps their potential suitor cares more about the number of customers that they gain.

Exactly. That's why the share price will continue to tank. The only way out of this for Vonage is to completely reverse that model, start aquiring customers at much lower cost and concentrate on profitability.

The real question is can they pull that off in the short term?

Quote:

Also the customer base keeps growing and that is what is valuable when evaluating the stock.

A customer base that cannot be easily monetised is completely worthless. Look at the stock price. That is the public valuing Vonage's customer base. As you quite rightly say, without profit, it's the only thing to value it by.

The problem is Vonage overpaid for that customer base in the first place. They cannot get their money back on it, let alone a profit.

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

Mistake

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

[quote="trillian"]

Quote:

Also the customer base keeps growing and that is what is valuable when evaluating the stock.

A customer base that cannot be easily monetised is completely worthless. Look at the stock price. That is the public valuing Vonage's customer base. As you quite rightly say, without profit, it's the only thing to value it by.

The problem is Vonage overpaid for that customer base in the first place. They cannot get their money back on it, let alone a profit.

I do not think that the public is valuing the company at all. Customers are not worth anything to the investing public. The public cares about earnings and dividends.

To state, however, that the number is customers is unimportant or that the customer base was acquired at a high price is very hard to determine. Nobody has 1.6MM Voip customers. That is almost a critical mass.

If Voip is going to grow, who will be the players? Cable company for sure and who else? It would be very difficult for a start up to enter this space. That's because Vonage and its existing customer base are firmly in place and putting major pressure on prices and new entrants.

Posts: 66 · Full Forum Member Joined: May 25, 2006 Posts: 66

Quote:

Nobody has 1.6MM Voip customers. That is almost a critical mass.

Vonage do not have "VoIP" customers. The Vonage customer base does not care to know what the technology is, they just want to make cheap calls.

Voip in a true sense offers the capability to go far beyond offering a "telephone service".

So looking at Vonage as a Voip company does not give an accurate picture. Vonage are a telephone company, and in that respect, their customer base is insignificant. The incumbents can undercut Vonage all day long, and they will as and when Vonage becomes a threat. At the moment, it's not a threat.

The volume of customers you have is only a relevant metric when each customer is profitable for your company. Vonage's customer base does not produce a profit - it's not a "value" element to the company, it's an overhead.

That's why it has dot-com bubble written all over it (massive over-borrowing with no profitability, intellectual property or infastructure). It's all overhead with no view to a return. It's just a case of "let's get really big". Brand building does have some value, but not the kind of figures Vonage are talking about or have spent.

That's why the market is not placing any long term value on it. And they're right not to in my opinion.

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

[quote="trillian"]

Quote:

Vonage do not have "VoIP" customers. .

??????

Voip is what this is all about!!!

In any case, this post was about the possibility that naked short sellers may be having problems borrowing the stock.