Wednesday, January 19, 2005

Down and Dirty On Level 3

I was thinking of picking up a little Level 3 as a VoiP play when I read the following analysis at Reflections on Equity. The proprietor of that site thinks the company is too debt-laden, amongst other things, to see an increased share price anytime soon. He continues
The last time I looked, Level 3 had a ton of debt. I bet you they have more now. In my opinion, there is no way that Level 3 is going to $7 until it gets rid of that debt. Also in my opinion, VOIP is not going to drive revenues high or fast enough to cover its costs. Adding VOIP revenue is like dropping water from an eye dropper into an empty 100’ radius pipe… Yeah, it’s filling up the pipes, but not enough. Remember, Level 3 was built on the premise on disruption and growth in bandwidth intensive businesses. VOIP is great, but probably not good enough to make Level 3 stock zoom.
The author goes on to compare wire line to VoIp, concluding that even if VoIp explosively took off, there be market saturation:
Wire line voice revenue into VOIP revenue. VOIP claims to have a much better cost structure because it can send packets of data along different routes, as opposed to circuit switched which keeps one route open for a voice conversation. 2-5 times less expensive seems a conservative guess. But maybe it’s more like 10 times as less. A key question. In best case scenario, assuming Level 3 runs all the VOIP traffic in the United States, and no other telecom company carries VOIP, it could potentially generate $40-100 billion revenue, at some future unknown point. Divided by 5 (4 other carriers plus Level 3) that gives Level 3 potential to generate $8-20 billion in revenue, at some unknown point in the future. A possibility, though not likely. Not bad, not bad, but perhaps a little too optimistic for how is little LVLT going to get from here to there while SBC, BellSouth, Verizon, USWest and the emerging consolidated companies of previous bankrupt CLECS and LDs attack them?
The problem with VoIp is precisely that: there are too many players. Look at Vonage , the company that for some reason I always think of when I hear VoIp--Vonage, a privately held company, has fallen prey to bigger dogs with bigger money muscles.

About Us | In the News | Management | Contact Us | Archive | Premium Membership | Terms of Use | Privacy Policy | Careers | FAQ

All quotes are 15 minutes delayed. Copyright © 2006 by Catablast! Media Group LLC, part of the SeekingAlpha network. Web Design by Synexio Systems. All Rights Reserved.