Covad: Riding in the Net Fast Lane

Just like many other broadband companies,
Covad Communications (COVD)
was a Wall Street darling, sporting a stock price as high as $66-5/8. Now,
the price is about $30-1/2.

The company is a leading provider of DSL (Digital Subscriber Line), which
uses the traditional telecom network to allow for high-speed Net access. Of
course, everyone detests dial-up and DSL is a great alternative, especially
for those who do not want to spend a bundle on T-1 lines.

True, the DSL market is crowded, but also fast growing. As for Covad, it is
methodically building its infrastructure, as well as expanding its product
offerings. For example, Covad has struck key agreements with BellSouth and
US West. These line-sharing agreements mean a reduction in the cost of
service and faster installations. This also means Covad can sign-up more and
more customers. So far, Covad services are available in 63 of the top
Metropolitan Statistical Areas (this is expected to reach 100 by the end of

Further, Covad is a full-service provider, catering to both residential
customers and small businesses. These services are offered primarily from
Internet Service Providers. But with the recent acquisition,
Covad will be able to allow companies to provide branded DSL services to its
customers (this is known as a Virtual Internet Service Provider).

Financially, Covad is solid. Revenue grew by 35% sequentially to $41.8
million in the first quarter. Also, cost of goods sold (COGS) were better
than expected, yielding 25% gross margins, while estimates were pegged at
about 17%. With such growth, it is not surprising that the company is the
leading national DSL provider, with over 100,000 DSL lines in service.
What’s more, the company is liquid, with about $1 billion in the bank

The demand for broadband is seemingly insatiable and Covad is taking
advantage of this. Agreements with BellSouth and US West add tremendous
credibility. Such agreements should help the company land other deals in the
future and put the stock back in the fast lane.

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