VoIP: Internet Phone Calls

12/05/2003 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

"Voice-over Internet Protocol (VoIP) is a developing technology that allows long-distance telephone calls to be made over the Internet. As an emerging tech market, it is a speculative area. For those aware of the risks, we offer the following picks from Neil George and Ian Wyatt.

"VoIP has been around since the beginning of the Internet," says Neil George, editor of Personal Finance. "It’s the standard by which conversations can be had over inter-linked webs of computers around the world. And like surfing the web, calls can be made effectively for free after making the investment in equipment. The catch has been that most Internet connections were slow and equipment was hard to work into the mainstream. That’s all changed. Broadband connections for businesses and homes are becoming the norm.

"Our favorite in this sector is Avaya (AV NYSE), which is a spin-off of the old Lucent Bell Labs. You’ve likely seen its commercials. But beyond its PR onslaught, its equipment is getting gulped down by big banks, manufacturers and governments. Buy up to 13. Next is a relatively new name, Inter-Tel (INTL NASDAQ). Like Avaya, it’s not hyper-expensive yet and is up front when Fortune 500 companies come to sign on the bottom line. Buy it up to 30. Last on the list is a blue-chipper, NEC (NIPNY NASDAQ). The Japanese electronics and computer company is on top of VoIP trend and is also getting more core business from the emerging and continuing hefty demands of China and the rest of the expanding Asian markets. Buy up to 9."

Ian Wyatt, editor ofThe Growth Report , adds, "Voice-over Internet Protocol could change long distance telecommunications as we know it today. Until recently, VoIP has been considered a sub-par alternative to placing calls over a conventional phone line, due to the poor quality of voice and the inconvenience of placing calls through a computer microphone. However, technological developments and more widespread broadband services have sparked renewed interest in this fast growing market.

"MIND C.T.I. Ltd. (MNDO NASDAQ) commands the largest install base of VoIP billing solutions worldwide. The firm is headquartered in Israel, and its customer list reads like a who's who of global communications companies, including Verizon,  China Netcom, China Unicom, Telefonica, and Southeast Telecom. It also has strategic relationships with Cisco, Ericsson, IBM, Alcatel, HP, Avaya, and 3COM.  MIND is profitable, and has $47 million or $2.22 per share in cash. MIND has appreciated significantly in 2003, from $1.50 a share. But we believe annual revenue growth of 25%-30% is quite reasonable, and we would expect net income to grow at an even faster clip. The shares trade at roughly one-half our projected growth rate, making them very attractive at current valuations. We are initiating coverage of MNDO with a Buy rating and a 12-month target of $7.50."

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