Street Sweeper Smacks MagicJack VocalTec

Shares of magicJack have gained nearly 10 percent over the past year, but fell more than 4 percent Wednesday morning after The Street Sweeper published a scathing report.

MagicJack is a cloud communications company that offers an application allowing users to make and receive telephone calls through a computer or smartphone by using a magicJack account for around $40 a year. According to The Street Sweeper's Sonya Colberg, the company benefited from an "early out advantage" back in 2007, but the benefits have "fallen apart like a busted magic trick."

The Magic's Gone

"Any smidgen of magic left in magicJack VocalTec is vanishing quicker than street magician David Blaine can make a new quarter disappear," Colberg wrote. "Now the former star of annoying, late-night TV commercials only wishes it could make its melting core business model reappear."

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Colberg cited PC Magazine, which reviewed a magicJack device in 2001, noting that when the technology first debuted "nothing else like it existed." However, this is no longer the case, as the segment is now dominated by the "AT&Ts and Verizons of the world."

In the face of stiff competition, magicJack is plagued with connectivity issues, along with "horrid" consumer reviews. As such, Colberg stated that active device users have "plummeted" 23 percent in the past two years. At the same time, device activations "bent in half and then some" over the past year and dipped below 120,000 activations in the third quarter compared to nearly 280,000 in the third quarter 2013.

Colberg continued that consumers "don't want to plunk down a big wad of cash" for a phone service when there are free alternatives such as WhatsApp, Facebook, Viber, Google Voice and Skype.

"As if that's not enough, monster companies such as AT&T and Verizon have changed their phone plans," Colberg argued. "Rather than consumers buying so many minutes, they now get unlimited talk and text. There's no need to pay magicJack or [competing firm] Ooma."

Bottom line, the report concluded, "It would take the combined magic of David Blaine, Criss Angel and Harry Houdini to breathe life back into this dead-end business."

Absent any "kind of magic," Colberg suggested that a "generous valuation" for magicJack would be $5 per share.