Google's Telecom Investments - Stock Implications (GOOG, AVNX, CIEN, JDSU, LU, NT, CSCO, JNPR, SI, VZ, BLS, SBC)
"Google is building a network so massive that several service provider specialists believe it could end up with one of the world's largest core transport networks, effectively building its own private Internet", reports Light Reading. Google is in the process of acquiring space in carrier hotels, purchasing dark fiber, and issuing RFPs for network equipment. It has also invested in powerline telco startup Current Communications Group.
Crains New York Business reported yesterday that Google bought the rights to 270,000 square feet of space at 111 8th avenue in Manhattan, a key New York interconnection facility.
Google's purpose in building its own network will be crucial for investors. According to Light Reading:
Why does Google want to do this? One idea is simply to reduce its telecom costs and peering fees, which many believe are significant. Another idea is that by building its own core network and focusing on Layer 1 and Layer 2, Google could control the distribution and security of much of the content and traffic distributed over the Internet. In a sense, it would be a higher-performance Internet, such as the research network, Internet2.
The impact on Google's stock will likely depend on which of these two goals is correct. If Google can demonstrate that it will earn a rapid return on investment in a telecom network through reduced peering fees, its stock may not be hit. But if Google launches a telecom carrier business without a clear revenue-generating or cost-saving justification, investors may argue that Google should be valued on a blended P/E multiple of a telecom stock and an Internet stock. That wouldn't be pretty.
Google's entry to the telecom market is also likely to impact other stocks. Light Reading's article had a hysterically joyful tone, and that's likely to be shared by other investors in telecom equipment and component stocks which have been in a deep bear market since the bursting of the telecom bubble in 2000. Google, according to Light Reading, has issued a $100 million RFP for optical transport (DWDM) equipment, and Siemens (ADR ticker: SI) and Ciena (ticker: CIEN) (as well as private Chinese telecom equipmetn company Huawei) are bidding. Although they weren't mentioned as bidders, Lucent (ticker: LU), Nortel (ticker: NT) and Alcated (ticker: ALA) are also contenders in the DWDM market.
A pick-up in orders for core optical transport gear would also benefit the optical component vendors Avanex (ticker: AVNX) and JDSU (ticker: JDSU).
Google would also need to purchase core routers to operate over the optical infrastructure. Vendors: Cisco (ticker: CSCO) and Juniper Networks (ticker: JNPR).
What about the impact on the telecom service providers? The RBOCs' competitive position and pricing power is derived from their dominance of local access connections (challenged only by the cable companies), not by their core transport networks. However, if Google's move into telecom is perceived as hastening the transition to free Voice-over-IP (VoIP) phone calls, the telcos' stocks could take a hit. Even the telcos' wireless businesses could by threatened if Google rolls out a large-scale WiFi network and VoIP and WiFi enabled handsets become cheaply available. The teleco stocks include Verizon (ticker: VZ), SBC (ticker: SBC) and Bell South (ticker: BLS).
Full disclosure: short AVNX, JDSU, CIEN, VZ, BLS, SBC (some via LEAP puts) at the time of writing.
Related:
- All Internet Stock Blog articles on Google.
- More on networking stocks.
- The complete list of Internet stocks (and links to articles about them) covered by The Internet Stock Blog.
« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »
Related Articles
|
Hedge Fund Jobs
Job Seekers: Search jobs by category, get job alerts by email or live feed, apply online See full list of jobs »
Employers: See all recruitment options, get applications online or by email Post a job »
Trading Center
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright