Monday, May 24, 1999
HOW DID IT DOUBLE?
Build it and they will come. That appears to be the prevailing attitude at Metromedia Fiber Network, one of the country's largest operators of fiber optic networks. With under $3 million in revenue in 1997, Metromedia has exploded onto the communications scene to service the nation's unending appetite for more and more bandwidth. Sales in the last quarter alone were $18.4 million, up from $1.7 million in 1998's first quarter, illustrating the breakneck growth the company is experiencing. Even more impressive is the fact that the company has already signed contracts estimated to be worth over $500 million in sales.
While Metromedia's bottom line has yet to maintain more than sporadic profits, that hasn't stopped investors from bidding the stock price to nearly 10 times where it was this time last year. Metromedia has undertaken a strategy of delaying current profitability in exchange for aggressively reinvesting in itself for increased potential earnings down the road. In the all-out land grab that is the digital revolution, Wall Street is realizing that grabbing more turf as it becomes available is a preferred modus operandi.
Mix in an exploding top line, a rapidly growing market, some sexy technology, and Wall Street's change of attitude towards (lack of) current profitability, and it is little wonder that Metromedia has had three stock splits during the past year while flying off the charts. Maybe a better way to describe the Metromedia phenomenon is to say, "Build bandwidth and investors will buy."
Headquartered in White Plains, New York, Metromedia Fiber is in the business of building high-speed fiber optic communications infrastructures in major cities around the globe. The vast majority of the company's network is located in the U.S., but the company has plans to expand its presence into Canada, Great Britain, and Germany.
What Metromedia essentially does is build an extremely "fat pipe" for data communications and then leases that network capacity to a variety of other carriers and corporations for a fixed cost. The company's strategy is based on the idea that Metromedia can concentrate on building the fiber optic backbone of a network and provide the service less expensively than an organization could build that capacity on its own.
Metromedia's network is used for a variety of applications including voice, data, and video communications. The technology has gotten to the point that two strands of fiber optic cable can transmit up to 129,000 simultaneous voice conversations. Metromedia anticipates that when its entire network is finished it will ultimately consist of approximately 1.1 million miles of fiber covering a net distance of about 9,000 miles.
Metromedia split its stock 2-for-1 on May 20 in addition to splits last December and in August of 1998.
Income Statement 12-month sales: $53.1 million 12-month income: ($0.6 million) 12-month EPS: ($0.00) Profit Margin: NA Market Cap: $9,248.2 million Balance Sheet Cash: $415.6 million Current Assets: $532.0 million Total Assets: $1,006.3 million Current Liabilities: $151.0 million Long-term Debt: $672.8 million Total Liabilities: $857.2 million Ratios Price-to-earnings: N/A Price-to-sales: 174.2HOW COULD YOU HAVE FOUND THIS DOUBLE?
One of the ways to have found Metromedia would have been to look at a screen for stocks that have beaten their earnings estimates. Metromedia has soundly bested its estimates in each of the last four quarters, typically a sign of strength in companies. Plus, looking at the stunning top line growth alone may have tipped one to the fact that the company was doing something right.
A more recent way to have learned about Metromedia was the Fool's Mother's Day special feature. In that feature, Fool David Forrest explained in no uncertain terms why he liked the stock and effectively told the bullish side of the Metromedia story.
WHERE TO FROM HERE?
One thing is for sure -- the need to move more and more information at faster and faster speeds is not likely to abate for the foreseeable future. Metromedia has quickly and effectively positioned itself to serve the ever-increasing demand for bandwidth, and few companies more directly benefit from the gross expansion of Internet and Intranet traffic. Plus, going "the last mile" and bringing fiber directly to many of its customers gives it a distinct advantage over many of its competitors.
While the prospects for Metromedia are extremely bright, it appears that Wall Street has already taken into account a large chunk of the company's expected growth. At a trailing price-to-sales ratio well into the triple digits and at roughly 70x the current revenue run rate, it's difficult to call the stock anything but expensive. Plus, the company is not expected to report positive earnings for at least the next two years, if it does at all.
Furthermore, Metromedia's business does not exactly make it easy for the individual investor to intimately know the company's products. It is fairly difficult to understand all the moving parts of the complex communications infrastructure business, and truly comprehending the inherent business risks and recognizing the trends is a formidable task for the average investor. It's always a good idea to stay within one's circle of competency.
Either way, Metromedia represents a case of what is often found here among the Daily Doubles -- hyper growth paired with a stratospheric valuation. Will the future growth be of the magnitude to justify the current price? It's a question that is not easily answered. As always, time will tell.
--Paul Larson (TMFParlay@aol.com)
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