Level 3 Communications' 33% Stock Gains in 2014 Might Be the Start of Something Bigger

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Shares of telecommunication services company Level 3 Communications have soared 33% this year as of Oct. 1. Looking back further, the stock has more than tripled the performance of the S&P 500 since the start of 2012. Yet even with this strong performance, Level 3's big bets on fiber optics might very well lead to accelerated revenue growth and additional stock gains in coming years.

What does Level 3 do?
Level 3 Communications creates more than 90% of its revenue from core network services, or CNS. These range from security services, providing core delivery networks, Internet and voice infrastructure, media delivery, and data center services. The remaining revenue comes from wholesale and contract services, primarily in voice.

Some segments of Level 3's business are clearly weaker than others. For example, voice services throughout the globe are struggling due to the rise of telecommunication services. The segment providing core networks for the delivery of data has also faced competitive pressure, as Apple, Netflix, and several other large companies have recently built their own networks to delivery content faster to consumers.

Level 3 has hedged against these trends by providing services and equipment to telecommunication companies and those building their own networks. Level 3 also has surging businesses like IP and data, data centers, and, perhaps most important, Internet. In fact, Level 3's big bet that Internet service providers will spend billions of dollars to boost speeds might just have a favorable outcome for the company's stock going forward.

Big bets on fiber
Over the last couple years, Level 3 has invested heavily into an asset called fiber, which can carry much more data than metal cables and is less susceptible to interference than bandwidth when dealing with the transportation of data.

Level 3 bought Global Crossing in 2011 for nearly $2 billion, creating the worldwide leader in fiber. The combined company had 34,600 route miles of metropolitan fiber in 170 markets, along with another 35,000 route miles of subsea optical fiber cable systems.

Level 3 wasn't done buying, either: A few months ago the company announced that it would acquire TW Telecom for $7.3 billion. Along with adding $1.6 billion of revenue and a company that's expected to grow 8% next year, TW Telecom provides Level 3 with another 27,000 route miles of fiber, with 21,000 miles located in metropolitan areas.

Why is fiber so promising?
While Level 3's reasons for bolstering its fiber position are large, including better network efficiencies in voice and with CDN, the real reason might be the enormous fundamental implications of upcoming broadband networks.

In the past, broadband Internet speeds averaged roughly 10 megabits per second. However, today there is a new class of broadband Internet services boasting speeds up to 1 gigabit per second, which is 100 times faster than average. This initiative has been led by Google Fiber, but AT&T, Comcast, and CenturyLink have all launched competing services.

While Google and AT&T already have large expansion plans for their superfast broadband services, such Internet speeds can only be found in a handful of cities today. This is because building these networks is very expensive. According to Goldman Sachs, it could cost Google $140 billion to expand its Fiber network across the entire country. That is the estimated cost for just one network, so AT&T, Comcast, and CenturyLink could also spend tens of billions of dollars to upgrade their own networks.

A key component to building these networks is fiber, both having the network in place and the fiber-optic cables in neighborhoods where the network is deployed. While Level 3 is not the only company that owns a large fiber network, it does have the largest. Given the large infrastructure investments needed by broadband providers, Level 3 looks poised to reap the rewards.

Foolish thoughts
Level 3's acquisition of TW Telecom gives it an increased presence in metropolitan areas, where Google Fiber and AT&T's GigaPower will be built first. This suggests Level 3 could boost its revenue rather quickly as these networks are built.

There's no way to put a dollar sign on what high-speed broadband build outs could mean for Level 3, as the company doesn't specify revenue for its many segments of CDS. However, if Google does spend $140 billion over the long term to bring Fiber to every household in America, and competitors spend many billions themselves, they will create an enormous market in which Level 3 will certainly play a large role. With this catalyst in mind, Level 3's stock looks very attractive, especially trading at just 23 times next year's expected earnings.

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The article Level 3 Communications' 33% Stock Gains in 2014 Might Be the Start of Something Bigger originally appeared on Fool.com.

Brian Nichols owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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