Think of me as a jolly old guy, rotund and bearded, with the kind of bad taste in clothes that leads to such excesses as red suits with white fur trim. I'm going to tell you about a stock -- one you may already know well -- that could be the best Christmas present you've ever given yourself. Or your kids, for their college fund, maybe.
It's even -- I find this a little hard to write -- a
stock, Heaven forbid. There, I've said it.
I know, I've written a lot here lately about the narrowing of the gap between traders and investors, suggesting that these days, no one can afford to be the old-time kind of investor: Buy, hold, get rich over the years. Today, it's buy bubble.com, watch it go up a hundred points, then dump it. Holding period: a week, maybe a month. And then buy it again and ride the escalator up a little more. Another month, another hundred points.
If that's your style, stop reading now. You'll consider me a hopeless old fogey. And by the way, make sure your parachute is strapped on tight because, my friend, you're going need it when the Big Whoosh comes.
But there is a stock of the old "widows-and-orphans" type -- think T in the '50s -- that really is a plausible buy-it-and-put-the-certificates-in-your-sock-drawer kind of investment. If you want long-term growth -- maybe the kind you got with
10 years ago or with
three years ago, this one's my candidate.
Just don't expect it to double in the next few weeks.
I'm talking about
, which I should begin by saying I'm long. My kid's college fund is long Qwest. My retirement fund's long Qwest. Because I believe that of all the relatively secure stocks you can buy today, Qwest offers the best long-term appreciation prospects and is a fit in nearly any kind of portfolio, except only those that must produce income.
You probably know Qwest's story. If not, here it is in short form:
When Denver billionaire
in 1996 for $5.4 billion, he kept the right-of-way next to the UP and SP tracks.
Anschutz started Qwest, based in Denver, and quickly hired Joe Nacchio, once the golden boy and heir apparent at
, to run the company. Qwest built high-tech railcars ("Rail Plows") that are, in effect, fiber-optics cable-laying machines and started digging trenches next to UP tracks across the country. (Having that guaranteed, paid-for right-of-way access in the bank is golden for Qwest; buying ROW is an incredibly time-consuming and expensive process.)
Into every trench go two conduits. One holds 48 pairs of fiber-optic cable, half of which Qwest pre-sells to its competitors, mainly
, to fund the construction. The other pipe is empty, allowing Qwest to easily and cheaply pull another 48 pairs for its own use later as demand increases. Qwest has its cable-laying costs down to about $1,000 a mile; after deducting payments for the glass they're selling to others, Qwest's net cost is about $100 per installed cable-mile.
Qwest is thus building for itself what will ultimately be a 16,000-mile fiber-optic network, reaching more than 125 U.S. cities, which collectively generate 80%-plus of the nation's voice and data traffic. More than half that cable is in the ground today; almost all of the rest should be complete by the end of 1999.
Qwest's play is to become the premier aggregator, owner and reseller of fiber-optic capacity -- just say bandwidth -- to long-distance carriers and private companies in the 21st century.
I think Qwest is making the right bet at the right moment with the right management. Because
bandwidth is going to be the gold of the first quarter of the 21st century.
and Microsoft together have been to the last two decades of the 20th century, Qwest and its competitors will be to the next 20 years ... or more.
Voice traffic is growing slowly, but data traffic is exploding. (Big surprise, huh?) So, the volume of data traffic will simply overwhelm voice traffic. Moreover, the world is moving rapidly away from the older, slower, spectacularly inefficient circuit-switched model to IP, or Internet Protocol, transmission. We think of IP as supporting Internet traffic, and of course it does, but voice-over IP is going to be huge. (Yes, right now voice-over IP is still a novelty; the ham-radio analogies are still valid. In a couple of years, that notion will be history.)
The demand for bandwidth is growing so fast that no one company, certainly not Qwest, can meet buyers' needs. MCI WorldCom, AT&T and many others are scrambling to lay fiber and light it as fast as they can, but demand is still likely to exceed their capacity to plant and light enough glass.
Wireless is becoming important, and it will eventually make all this buried glass obsolete, but not anytime soon. The speed, capacity and security of fiber-optics communications are so far ahead of wireless as we now know it, and as wireless will remain over the next couple of decades, that fiber will be the preferred and dominant medium for voice and data communications for the foreseeable future.
Nacchio and Anschutz understand that. They also appreciate the need for revenue as you grow a company, and so earlier this year bought
, a telecom company twice Qwest's size, for $4.4 billion of Qwest stock. Before the buyout, Phil Anschutz owned about 85% of Qwest; today that's down to a shade more than 50%.
The combined companies' market cap is about $15 billion; Qwest was trading around 44 midday Wednesday, up a split-adjusted four times over its June 1997 IPO price. Nacchio predicts about $3 billion in 1998 revenue and $400 million in earnings (EBITDA).
Seems to me you have to make seven assumptions to buy into my argument that Qwest is potentially The Next Big One (think Microsoft,
, with a potentially explosive future and little downside exposure at the $40 level:
- Bandwidth demand explodes. Duh.
An inventory of fiber in place, "dark" but ready to turn on, will be an immensely valuable asset for years to come. Ditto. How else can we meet that demand for bandwidth?
Qwest management understands how to grow a company, and Joe Nacchio is a superb "stock manager," a la Jeff Bezos at
Amazon (AMZN) - Get Report. In the Internet era, a mere four-times gain over 18 months may not dazzle -- oh, but we are jaded! -- but it's solid growth, and has laid the basis for Qwest's future. Qwest's management team is deep and experienced.
Qwest's competition won't be able to catch up. Qwest isn't going to dominate this market completely: The market's too big, and the competitors are strong.
IXC Communications (IIXC) , for example, is a well-run, well-financed company, arguably the equal of Qwest. But for the investor, Nacchio's halo on Wall Street is a huge asset: Qwest keeps outperforming IIXC in the market and is likely to continue to do so. Other powerful competitors have emerged:
Level 3 Communications (LVLT) , spun off from
Peter Kiewit Sons', the Omaha, Neb., construction giant and now run by former Qwest board member James Crowe, and
Williams Communications, part of Tulsa oil giant
Williams (WMB) - Get Report. And of course, MCI WorldCom. But Qwest is likely to stay ahead. (You could do a lot worse than build your own "bandwidth portfolio," with all five.)
Regulation won't ruin the business. Always a risk. Qwest has already had one setback from the
FCC, which in September knocked down a deal it had struck with
Ameritech (AIT) - Get Report and
US West (USW) to resell at retail cheap long-distance service over the Qwest network. Qwest may continue to find obstacles
read: land mines planted by lawyers from traditional long-distance carriers, such as AT&T and MCI WorldCom in its path in the retail business, but its future is in selling bandwidth wholesale, not in peddling long-distance service to consumers.
Advances in technology and overbuilding by competitors won't ruin the business. Technology marches ahead in fiber transmission: We're able to stuff more and more data into a given strand of glass with new flavors of multiplexing. And in so lucrative a market, others will build like crazy. (LVLT is already laying three conduits across America.) But the nearly insatiable demand for bandwidth is likely to absorb all the capacity now under construction and planned almost as soon as it's available, even with sophisticated multiplexing tricks. And Qwest will almost certainly remain the lowest-cost bandwidth reseller, so it should be able to defend itself, even in an overbuilt market. Again, you've gotta believe in this explosion of demand for bandwidth, or you ought to stay away from all these companies.
Qwest will find the right partners and cut smart deals. If you're a reseller, you've gotta ... well, resell. So building long-term business partnerships is a key for Qwest. So far it's done well, partnering with GTE, MCI WorldCom and others, including Microsoft, from which it received a $200 million investment and the right to use NT networkwide in a deal announced last week. The reasons given for the Microsoft investment make no sense whatsoever. But think of Microsoft's investment in companies it wants to sell set-top boxes to, and you get the idea: MSFT wants to make sure it's a player in the large-scale network services business. And $200 million bought a cheap seat at the table.)
I'm not the first to note that Denver is the wrong home for Qwest in many ways. This is in every sense a Silicon Valley high-tech company, not an old-tech phone company. (Don't tell
that; he thinks Qwest is just another boring phone company. Little does he know...) Qwest should, and soon enough will, be seen -- and valued -- like the high-tech star it is. It is, in fact, arguably an Internet company. (Fasten your seat belts.)
My price target for Qwest? I don't have one. If I put up a number like $400, you'd think I was playing Internet-stock analyst. Let's just say I think that out about five Christmases from now, you'll be ho-ho-ho'ing from the rooftops.
So ... that's my Christmas gift to you this year: a stock you can actually invest in, not just trade in and out of. Reminds you of Christmases past, doesn't it, Ebenezer?
May it make you wealthy, if not necessarily healthy or wise. And if it doesn't, blame the fat guy in red with those funny-looking deer, not me.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, Seymour held a position in Qwest, although positions may change at any time. While Seymour cannot provide investment advice or recommendations, he invites your