Should You Buy or Sell Level 3 Today?

Owning shares of Level 3 Communications (Nasdaq: LVLT  ) is a proven cure for narcolepsy. Setting aside the unpopular 15-for-1 reverse split the data networker carried out last year, the stock swung between $16.50 and $40 per share in 2011. In 2012, Level 3 has gained a market-stomping 51%.

Is it high time to jump aboard the Level 3 bandwagon, or has the stock become too valuable for its own good? Let's run down the key arguments on each side of the debate.

Buy:

  • Investing in Level 3 means that you really believe in the value of synergies. The company is a serial acquirer, with the most recent big-bucks bet being fellow networking specialist Global Crossing. Management wants to create a whole that's greater than the sum of the parts, and the market isn't giving Level 3 much of a markup for that strategy today.
  • Economies of scale also matter greatly to this stock. Level 3 is not just big in America but wields a global network that few competitors can match. In theory, Level 3's business should profit more than most telecoms as mobile data and digital video services push up the global demand for high-speed connections.
  • Then there's the cloud. Level 3 is not just a plain-vanilla network provider; the company also sells content delivery services that hold their own against sector titans Limelight Networks (Nasdaq: LLNW  ) and Akamai Technologies (Nasdaq: AKAM  ) . To prove this company's significance in that particular hypergrowth market, Level 3 shares the load for delivering video streams to Netflix (Nasdaq: NFLX  ) customers with -- you guessed it -- Limelight and Akamai. That's one high-profile account to own a slice of, folks.

Sell:

Hold:
In all honesty, I can't find a reasonable argument to stay neutral on this stock. Either you believe in an acquisition-fueled turnaround, in which case Level 3 looks tremendously cheap, or you see management mistakes repeating themselves endlessly, and then you won't touch the stock.

I like turnaround bets as much as the next guy who likes turnaround bets as much as I do, but when I look at Level 3, I only see a large pile of burning cash that isn't likely to reverse course anytime soon. It's not even a good takeover play, as a massive debt load makes the enterprise value more than twice the size of Level 3's market cap.

In short, Level 3 is a sell for me and I'm starting a negative CAPScall to reflect that conclusion. Four months ago, I said that the company has a lot to prove in 2012, and I think investors have jumped to unreasonable conclusions long before the company served up any pudding. There are just too many superior ways to invest in the cloud computing revolution to bother with cash-burning also-rans like Level 3.

Fool contributor Anders Bylund owns shares in Netflix but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 10, 2012, at 12:54 PM, stupidmf wrote:

    Ok, grain of salt, this article was written by this guy:

    http://my.fool.com/profile/TMFZahrim/info.aspx?source=iapsit...

    ..State school with his investment experience/ depth of knowledge, written out in a few lines- no graduate degree, finance degree, no real investment experience..occupation says "writer".

    Just another glorified blogger with no real pith, market knowledge past ticker symbols, what he reads from other, with other goals in mind.

    I can look at stock prices too, read a few articles and come up with emo fodder like this..

    If there was any real depth, analysis to this article, I wouldn't care about the synopsis..this is just bad, uninformed, biased info, poorly presented.

    I thought the term fool was supposed to be ironical..

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