Shares in Level 3 (LVLT) are up almost 15% over the last three days. Telecom equipment stocks including Nortel (NT) and Alcatel-Lucent (ALU) are doing well based on the assumption that network build-outs will help their order books. There have been some positive comments in the press as well.
But, the Level 3 revenue dynamic is really different than the telecom equipment one, so it begs the question of whether the stock should be rising. Level 3 is a bandwidth demand play, which does not strictly go arm-in-arm with telecom equipment orders.
Morningstar recently pointed out that Level 3 "has not proved that it can generate enough profits to support its hefty debt load" Fair enough. And most of the debt restructuring the company could accomplish is now behind it. The research firm has a "fair value estimate" on the shares of $4. The stock currently trades above $6.
Level 3 is in a simple foot race. Demand for bandwidth is clearly increasing as the amount of data and video going across the internet increases. But, bandwidth capacity may still be more than enough to accommodate this need. If so, the "commodity price" of bandwidth will keep falling. At least for the time being.
With its stock up over 200% in the last two years, LVLT needs to show it is winning its race.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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