Is This Technology Stock the Next Big Thing?

Technology companies are often popular stocks to invest in because of their high growth possibility. Just look at Apple -- that company has made its shareholders a huge amount of money. However, just like with any other sector, there are potential highfliers, and then there are the duds. Let's see how Level 3 Communication (Nasdaq: LVLT  ) stacks up.

Cheap ... but worth it?
Currently, Level 3 Communications -- a communications company offering broadband, network, Internet, and media services -- is trading around $1.88, which seems cheap when you compare it with its high of $117 during the dot-com bubble of 2000. But is there a reason it's priced so low?

Unfortunately for investors, Level 3 Communications has a number of red flags associated with it. Since failing to lease enough bandwidth to companies like Verizon Communications (NYSE: VZ  ) , and BellSouth in 2001 after building nearly $10 billion worth of new pipes, Level 3 Communications has been plagued with problems.

In recent years Level 3's total net income has steadily climbed -- negatively. Since 2008, net income has gone from -$318 million to -$622 million in 2010, and operating income has followed right along in the negative digits.

On the positive side, cash flow runs close to break even, but when you consider Level 3 Communications' debt level is growing -- from 2009 to 2010 long term debt grew from $5.8 billion to almost $6.4 billion, and its interest coverage ratio sits firmly in negative territory -- there's still a lot of risk among the company's financials.

Lastly, Level 3 Communications just announced a merger with Global Crossing, an unprofitable company, for $1.9 billion with the hope that cost savings will help rectify Level 3 Communications' troubled financials. Regrettably, mergers rarely provide the savings mangers believe they will.

Hope for the future?
Although Level 3 Communications has had a less than stellar past, there may be hope for the future as it tries to expand into content delivery networking, or CDN. For example, Level 3 Communications has already scored a lucrative deal to be the primary content delivery network provider for Netflix (Nasdaq: NFLX  ) .

On the flip side of that coin, as Level 3 Communications expands into CDN, it will have to compete with competitors like Akamai Technologies (Nasdaq: AKAM  ) , AT&T (NYSE: T  ) , Internap Network Services (Nasdaq: INAP  ) , and Limelight Networks (Nasdaq: LLNW  ) . How Level 3 Communications will fair against its competitors has yet to be determined, but it has managed to takeover Akamai's position as the primary CDN for Netflix from Akamai. Perhaps that's a sign that there's hope for this floundering company?

Uncertainty is the name of the game
There's always the possibility that Level 3 Communications will be able to turn things around -- CAPS players seem to think it will. But looking at the problems it's currently facing, a turnaround is going to be tough.

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Fool contributor Katie Spence likes stocks with lots of promise. She does not own shares of any company mentioned above. Motley Fool newsletter services have recommended buying shares of AT&T and Netflix. Motley Fool newsletter services have recommended buying puts in 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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