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Global Crossing is an undersea giant
The company may parlay its fiber-optic network and business strategy into telecom dominance in the internet age.
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This month in our column, we want to highlight a company we believe is on the fast track to becoming the first international bandwidth utility. Today there is no economy but the global economy, no Internet but the global Internet and no network but the global network. Global Crossing (NYSE: GX) recognized this trend several years ago and has nearly completed an ambitious, capacious global fiber-optic network that should reward shareholders for many years to come.
The traditional circuit-switched networks that were the foundation of the telephone companies until the early 1990s were built to carry voice telephone calls. These networks were mostly copper, relying almost entirely on electronics. With the development of the Internet and the associated explosion in data traffic, they could no longer perform with data and voice sharing the same pipes. This shortfall in capable networks gave rise to myriad companies that built networks of a new medium: fiber optics. Using the speed and bandwidth of light, these photonic networks have emerged as the carriers of most network traffic today. The first player to recognize the enormous opportunities of controlling a global network was Global Crossing.
Company’s vision
Global Crossing’s vision, and its ability to raise billions in capital, has given it a first-mover advantage spanning 2 to 3 years. Its completed network will span the planet, reaching 27 countries and more than 230 of the largest cities. The beauty of the network is its focus on the choke point for the global Internet, the crucial missing element that will connect continents in milliseconds: undersea fiber. The law of locality states that 80% of network traffic is local, 95% is continental and 5% is intercontinental. These numbers illustrate the scarcity in the global network, as only 2% of new fiber is transoceanic. The paucity of subsea fiber has given Global Crossing a tremendous advantage that will likely be magnified by the difficulty facing potential competition of obtaining new financing in our capital markets.
Management’s vision did not stop at the beaches. Global Crossing has made dozens of strategic acquisitions of companies with land-based networks in large cities. This lets it offer an end-to-end, one-stop-shop solution for customers, eliminating most costs associated with data transmission or phone calls. Previously, a phone call or any global transaction required an average of 13 handoffs between different carriers. There was no seamless network that could shoot a Web page or a request for inventory status in a big business across the globe without the costly leases, handoffs and tariffs that comprise the bulk of consumer costs. Further, for data packets the speed of such an awkward transaction is abominable when compared to a photon that can circumnavigate the globe on Global Crossing’s mirrored glass in 100 ms, or one-tenth of a second.
Successful strategy
The superiority of Global Crossing’s network and business model have been validated by its continued financial success when compared to the struggles of its rivals AT&T, MCIWorldCom and Sprint. While these companies have all warned of earnings shortfalls at least once in the last 2 quarters, Global Crossing has provided upside earnings guidance to its already impressive estimates. Part of Global Crossing’s brilliance was to recognize early on that long distance would not be a profit center for the future. Its strategy has been to ignore the razor-thin margin arena of consumer long distance while focusing on data-centric services. This differentiation has allowed Global Crossing to exploit its unique assets and bundle voice applications virtually for free. In a paradox of sorts, Global Crossing has capitalized on the economic law of elasticity, gaining tremendously from the collapsing price of its own product. Global Crossing has begun charging customers by the “bit,” or amount of data used, much like a water or electric utility. As the price it charges per bit drops, the demand for bandwidth increases at such a rate that it more than offsets the price decrease. So for every 1% drop in price, their revenues actually rise by 1.5%.
Global Crossing’s strategy is paying huge dividends. From a valuation perspective, an investor who can buy Global Crossing in the teens gets one of the most dominant growth stories at a few bucks per share. At $17 per share, the market values Global Crossing at $15.5 billion. It has a $3 billion stake in Exodus Global Center and a $2 billion stake in Asia Global Crossing. It is receiving $2.75 billion net after taxes for the sale of its ILEC (Frontier acquisition), and it has another $1.25 billion in cash. If you deduct these assets from its market equity valuation, then the market is valuing Global Crossing’s core business at roughly one times revenue. This valuation is absurd and unsustainable on the low end, given the company’s cash generating prospects. Global Crossing recently stated it expects cash revenues in 2001 of $7.1 to $7.2 billion, a staggering number for a company that is barely 3 years old.
Continued success
In 2001, we expect the good news to continue to come out of Global Crossing. It continues to become the service provider of choice for any financial firm, government, high-tech and manufacturing multinational, and infotainment conglomerate whose success depends on its global reach. Global Crossing’s latest deal with the British government demonstrates the wealth creation of its business plan, evidenced by its $250 million, 10-year deal to link its 240 worldwide embassies and consulates. This was accompanied with a 5-year, $150 million dollar contract with Computer Sciences Corp.
Our firm has been using the tax selling at the end of calendar year 2000 and the telecom sympathy selling (guilt by association to the problem of AT&T, Sprint and MCIWorldCom) to accumulate shares of this aquatic giant. We think Global Crossing will likely emerge as the dominant telecom company of the Internet age, and we would use weakness in the upper teens as a strong entry point. We expect the company to continue its flawless execution and reward shareholders that recognize its daring vision and global dominance.
For Your Information:
- Fred L. Dowd is a registered investment adviser and portfolio strategist with physician clients throughout the United States with offices at 104 S. Wolcott St., Ste. 740, Casper, WY 82601. He can be reached at (800) 252-3693; fax: (307) 234-3557; e-mail: fldowd@fldowd.com; web site: www.fldowd.com.
- Guest contributor Jeffrey B. Osher is a registered representative and portfolio strategist for the Fred L. Dowd Company.