Vonage ( VG) can't get any breaks from Wall Street.

The largest provider of Internet phone service had one of the worst-performing IPOs in recent memory. Shares are down 48% since they began trading May 24.

Though some investors may see this as a buying opportunity, Citigroup analyst Michael Rollins is urging caution. He initiated coverage of the stock as a hold with a speculative-risk rating.

"We believe the company has an opportunity to offer a favorable value proposition to end-users for voice services, but since the IPO, recent channel checks and data points have identified possible limitations on its current distribution model that run the risk of diluting long-term margins from potentially higher distribution costs or cheaper service pricing to acquire customers,'' he writes. "Also, new developments since the IPO may weigh on seasonally weak second and third quarter results and limit the level of upside potential for the stock until top-line results materially outperform expectations and/or the uncertainty around new pending lawsuits is resolved."

Citigroup was one of the underwriters for Vonage's IPO. The company's research and investment banking departments operate separately from one another.

With more than 1.6 million customers, Vonage is the largest provider of Internet phone service, also called VoIP. The company promises to save consumers as much as 50% on their phone bill, which is putting pressure on traditional phone companies.

"Vonage has a window of opportunity vs. its stand-alone competitors with a solid value proposition, solid progress towards its E911 mandate, according to SEC filings, variety of devices, and both direct and indirect distribution,'' he writes.

Vonage's shares also are being hurt by the negative publicity surrounding the IPO. The company angered investors by suggesting that customers who bought the stock through a special allocation might be able to get their money back. Later, Vonage said it expected people to stand by their purchase commitments.

While revenue will gain 139% to $142 million in the second quarter and grow 128% in 2006 to $615 million, Rollins expects the company to lose money. Rollins is forecasting a second quarter loss of 55 cents and a loss of $2.08 for the year.

"We recognize Vonage's management team has done a solid job of taking a concept and technology and turning those ideas and capabilities into a marketable product,'' he writes. "However, we still believe the company's credibility will be formed on the basis of performance and delivering on other commitments that could relate to financial, strategic, managerial, governance issues. To date, we believe management has succeeded in some areas and had mixed performance in other areas, such as the issues that developed around the constrained supply of customer care services.''

Rollins estimates that Vonage will burn $124 million in free cash for the second quarter and $389 million for the year. That will moderate to $255 million next year.

By 2010, Rollins sees a brighter picture at Vonage. At that time, the company will have "substantially positive cash flow." Revenue between 2007 and 2010 will also more than double.

Shares of Vonage rose 20 cents to $8.79.