dcsimg
RealTime IT News

Goldman Sachs Takes Axe To Telecom Market

Analysts at Goldman Sachs & Co. took the axe to many of the high-tech industries biggest names Wednesday, downgrading stock value ratings in the face of continued market conditions and financial difficulties.

The investment firm's analysts were indiscriminate in their concerns over which types of companies were to blame for the bullish tech sector and predicted the problems to last at least through the second half of 2001. Downgraded were competitive local exchange carriers (CLECs), Web hosting companies and long-haul fiber carriers.

In a report released to investors Wednesday morning, the firm hit the telecommunications market hardest, giving a thumbs down to five CLECs in the U.S.: XO Communications, McLeodUSA, Network Plus, Focal Communications and Net2000.

The five independent voice and data companies, already facing flagging stock values from shaky investors, will continue to see problems until conditions in the marketplace and their own operations change, the report said. However, it continued, the sector's long-term value shouldn't be overlooked.

"To varying degrees stock prices already reflect this pessimistic assessment, but we believe that the group will continue to underperform until various challenges are worked through," the report summarized. "Despite our continued near-term caution on the group, we believed that the long-term thesis is intact namely, that the best-managed, well-capitalized CLECs will capture significant market share by virtue of their service intensity, bundled offerings and attractively priced service packages."

Inter-related factors led to the firm's low opinion of independent carriers, a three-headed chimera that is causing many independent companies to collapse:

  • High debt levels, which eat into any company profits almost before it can be spent.
  • Nearly non-existent equity funding, which was responsible for the huge growth by CLECs the past three years and subsequently responsible for the huge debt load now. Operations that used to be funded primarily through venture funding are now reliant on actual company revenues, which can hardly support the many different costs.
  • Lowered earnings before interest, taxes, depreciation and amorization (EBITDA) ramp assumptions caused by the high debt load.

In the hosting sector, Goldman Sachs used Loudcloud, Inc., as its example of what young, upstart infrastructure company face in today's bullish market. The company, with only $11.7 million in revenues last quarter, managed to rack up $60.3 million in losses mainly due to increased demand and equipment rental costs.

Despite the Loudcloud's increased customer base, the investment firm considers the opportunities for Web hosting companies "finite" while the risk for investors is "prohibitively high." Also appearing on Goldman Sachs downgrade list were Exodus Communications and Equinix, Inc.

In the fiber carrier market, WorldCom, Inc., Level 3, Williams Communication Group and MetroMedia Fiber Network, Inc., were downgraded.

It was no news that MetroMedia faced downgrade by Goldman Sachs and other investment firms in New York. The company, already on the financial ropes, announced last week it received a one-month extension to make its $350 million payment to creditor Citicorp.

But investors are wary about the continued value of a company that can't make its payments. With a certain amount of irony, Goldman Sachs analysts said that investing in MetroMedia is "only suitable for investors with the highest tolerance for risk;" not a ringing endorsement by any stretch of the imagination.

Analysts weren't worried about the company facing liquidation in the near future, however. Metromedia's operations, which consist of facilities-based connectivity for corporate customers and telephone companies alike, is in little danger of being completely wiped out.

Meanwhile, Level 3 and Williams have been hampered by the slowdown caused by the "last mile" carriers, notably the data competitive local exchange carriers (DLECs) and CLECs. Because these carriers rely heavily on the telephone companies that are having a tough time deploying their digital subscriber line (DSL) and other broadband services, Level 3 and Williams have been taking huge losses.

That, despite figures by Goldman Sachs which show that while demand for fiber optics in the U.S. has been growing at a rate of 100-200 percent every year, the demand hasn't been nearly as much as analysts had planned.

"As a result, pricing has fallen more rapidly than expected, averaging over 50% on some common inter-city routes this year, such as NY-LA," analysts reported.

Also affected was the WorldCom Group which has seen its net income drop 27 percent, before accounting, in the last quarter. A combination of the slowdown in Internet growth and the company's continued existence in the long-distance market, causing them to be downgraded from recommended to market outperform.