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Technology Stocks : GX Investors Thread

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To: qveauriche who started this subject	9/1/2001 12:19:50 PM
From: carranza2	Read Replies (1) of 586

This is probably old news to the old hands here: The Motley Fool's GX board contains has a lot of talent. An example is the following post by angello: Your reasoning in terms of tangibles versus the intangibles of the dotcoms was my original thinking in investing in GX rather than any dotcom. But I got badly burned nonetheless. The problem is that GX has substantial intangibles on its balance sheet along with substantial debt. The bottom line is that its tangible book value is negative. That means that its debt is larger than its tangible assets. In other words, there is no tangible equity supporting the stock price. The only support is the expected future earnings which, if they are substantial enough, could be used to pay down the debt. (You should not take the debt reduction in the last quarter as a constant trend. GX sold its ILEC for $3.5B last quarter and used some of that money to pay down some debt. That is not recurring.) If you think about this, you can start to understand the decline in the stock price specially given the fact that revenues for the 2Q01 were slightly lower than for 1Q01. That is very worrisome not in absolute terms but as a trend. GX needs for the exact opposite to happen, that is, for revenues to increase and increase substantially and pronto. It can no longer live on an expected future when "the network is finished". One bright spot that I see in the latest 10Q is that revenues from the communications part of the business (which is the main part) continue to increase (although not as fast as one would like) in spite of declining unit bandwidth prices. The shortfall in revenues came from the undersea cable laying unit which had an enormous (although understandable) dip which will not recover for a good while. In fact it may continue declining. Another bright spot is that IRU sales actually increased when many analysts had predicted they would decrease. IRU sales are long-term contracts which are pre-paid. The latter is really good for GX because they provide cash immediately which can keep the bankruptcy wolf at bay. I think this is the reason GX expects not to burn any net cash the rest of the year. But that is a precarious situation. If revenues decrease due to pricing pressures and/or recession, GX's balance sheet will continue to deteriorate. That will put continued pressure on the price. It is true that the $1.7B credit line could be used to keep the company going but, in today's investing environment, that would undoubtedly also hurt the stock price. I think the bottom line is that GX will probably survive but it will probably be a while before an improvement in its business outlook makes an upside more likely than a downside. However, I have no idea how low it will go. A lot will probably depend on how the general economy is doing and right now that ain't so hot which again argues for lots of caution with GX. I think another problem with this company is that it is not so easy to understand its financials. It's possible many investors get confused. You mention the Exodus stock write down. That is directly related to the goodwill issue. If the market has not priced in GX's large goodwill number, the price may take a tumble when this news comes out.

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