How online videos can make you rich
As demand for bandwidth grows, Corning and Cisco will profit from a new Internet construction boom.
(Money Magazine) -- More and more data go speeding along the information superhighway every day. Only trouble is, the roads in the U.S. are too narrow, and they're getting clogged. Unless carrying capacity increases rapidly, Internet users will experience more and more traffic jams in the form of slower service.
So capital spending is going to have to ramp up. And no two companies should benefit more than Corning, the leading maker of optical fiber that carries data, and Cisco, the top manufacturer of switching systems that direct how all the packets of information get to their destination.
The U.S. led the development of the Internet, but during the past decade it has fallen behind other countries. Canada, France, Japan and the U.K. are all better connected, according to the Information Technology & Innovation Foundation, based on speed, price and availability of service.
In fact, the U.S. is rated a dismal 15th. That's untenable. Traffic per person is several times as heavy in some other parts of the world.
There are several reasons America is so far back in the pack. Smaller countries such as South Korea and Finland have an easier time reaching the vast majority of domestic consumers.
And ironically, the U.S. suffers because of its earlier leadership. Countries that adopt a technology later often get to invest in more modern and less expensive systems after the bugs have been worked out.
Another reason the U.S. trails: the long hangover that followed the tech wreck. Companies overinvested in telecom during the boom of the late 1990s. When that bubble burst, there was lots of excess capacity that wasn't fully employed for at least five years. By the time all the old gear and wiring were fully in use, networks had become outdated. So the U.S. is going to have to build additional networks and upgrade existing ones.
There's a reason capacity is being eaten up: the availability of audio and video Web programming and the growing appetite for it. Audio files use roughly five times as much bandwidth as text, and video can require 45 times as much, says Robert Shapiro, author of "Futurecast" and chairman of Sonecon, a consulting firm that has done extensive research on the Internet.
And there's more driving this demand than YouTube. Online television watching is going mainstream. The major broadcast networks have all set up sites that offer streaming video on demand for many popular shows. And online HDTV, as well as technologies yet to come, will require far more capacity.
Sooner or later, the need for greater bandwidth will spark a construction boom. "Over the next 20 years, capital spending on Internet infrastructure in the U.S. could be 50% to 100% more than is anticipated today," says Shapiro.
A broad range of companies will benefit, and new competitors will doubtless enter the field. But established leaders such as Corning and Cisco should reap much of the gains. Annual earnings growth for both stocks is projected to average 14% or more over the next five years. And though results may be subpar for the next few quarters, they should pick up robustly before the end of 2009.
Corning (GLW, Fortune 500) and Cisco (CSCO, Fortune 500) have had big runs at various points in the past three years, but their share prices have slumped recently. So despite stellar prospects and little debt, both stocks now trade at less than 17 times earnings.
That's a reflection of today's poor economic prospects, as well as the fact that large growth stocks remain undervalued compared with the shares of slower-growing but steadier companies. If you're a long-term investor, this situation represents a perfect buying opportunity.
Corning has three major businesses that offer high potential growth. The most dynamic at the moment is liquid crystal displays. Sales for that division rose 58% in the most recent quarter.
Corning's optical-fiber business isn't nearly as robust now, but that will change as Internet capital spending ramps up. The third important division makes high-tech emission-control systems, especially for trucks. This business is growing at double-digit rates and could pick up further as concern for the environment intensifies.
Cisco, of course, is the world leader in Internet equipment, particularly the switches and routers that direct the flow of information. Cisco's share price has fallen 24% from its 2007 high on recession fears, even though the company is posting double-digit gains in sales and earnings.
Cisco has also steadily bought back stock: It has repurchased more than $52 billion over the past seven years. That gives shareholders great potential for capital gains as more and more people use computers to watch 30 Rock and Lost on their own schedules and clog up the Internet in the process.Send feedback to Money Magazine