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We downgrade our recommendation on j2 Global Inc. (JCOM - Analyst Report) to Underperform, solely based on its current valuation, which has soared more than 75% in the last year. During the same period, the bench mark S&P 500 index soared a little over 27%. We believe j2 Global is currently significantly overvalued and the valuation metrics must converge to the S&P 500.

Why the Downgrade?

j2 Global’s business is sensitive to overall macroeconomic factors, particularly weakness in credit markets. The company has a vast majority of credit-sensitive customers from lending and mortgage industries and other financial institutions.

Although revenues from these sources improved, we believe estimates for the future results may become volatile as the global economy continues to face challenges. Furthermore, synergies from the digital media acquisitions may take longer time to materialize than previously expected.

Competition in the outsourced, value-added messaging and communications industry is fierce and continues to intensify. j2 Global faces intense competition from fax-to-email providers, broadcast fax companies, traditional fax machine/multi-function printer companies, unified messaging/communications providers, telephone companies, voicemail providers, companies offering PBX systems and outsourced PBX solutions and email providers. j2 Global’s business substantially depends on the capacity, affordability, reliability and security of its telecommunications networks.

Other Stocks to Consider

j2 Global currently has a Zacks Rank #4 (Sell). However, other stocks in the Internet/Application software industry that are currently performing well include eGain Corp. , TeleCommunication Systems Inc. (TSYS - Snapshot Report) and NIC Inc. (EGOV - Snapshot Report). While both eGain and TeleCommunication currently have a Zacks Rank #1 (Strong Buy), NIC has a Zacks Rank #2 (Buy). 

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