2HRS2GO: Meet the next back door Internet play (yeah, sure)

5 min read

I've got a great back door Internet investment play for you.

You can't miss with this one. It's profitable, reliable, and able to give you real cash, not just paper capital gains. The company's profits are guaranteed, literally. And it's an operation that is absolutely vital -- more than Cisco Systems (Nasdaq: CSCO), more than Sun Microsystems (Nasdaq: SUNW) or Oracle (Nasdaq: ORCL) -- to the continued growth of the Internet industry.

Have an opinion on this?

So take a closer look at ... PG&E Corp. (NYSE: PCG), the provider of electricity to most of northern and central California. Including Silicon Valley.

It's a simple thesis: these technology and Internet companies can't do anything without electricity, PG&E remains the monopoly distributor (although theoretically no longer the sole generator, since competition (HAHAHA, yeah right) has come to California) of electric power in the world's largest tech center, therefore, PG&E's growth and success depend directly on the growth of the tech industry.

And unlike those unproven Web stocks, top and bottom line visibility is crystal clear for all utilities, since their profits are written into law, particularly for distribution businesses. At least that's the theory, though in actual practice the company's profit depends on rate hikes being approved.

There may even be a direct Internet play someday, since Internet access can be offered over power lines -- the second largest ISP in the United Kingdom happens to be an electric utility.

Best of all, PG&E is cheap (especially since an administrative law judge recommend that utility regulators reject the company's latest request for a rate hike).

All of this is true, yet individual facts can be logically tied into the large, odorous, festering piles of pig dung. In the case of PG&E-as-Internet-play, the fecal nature of the argument is obvious.

But the same silly logic comes into use as the market searches for rear entries to the Internet. Because most Web stocks are overvalued pockets of air, investors and market observers are desperate to find cheaper ways to benefit from the Internet's potential.

Thus, the likes of the soon-to-be-public United Parcel Servce (NYSE: UPS) are being touted as Internet companies. Zona Research says more than half of all e-commerce sales are shipped via UPS, therefore it must be an Internet company.

Never mind that the overwhelming majority of UPS revenue comes from the real world. Never mind that there's nothing virtual about driving a truck, flying a plane, or maintaining a huge infrastructure of fuel depots, warehouses and way stations to make those tasks easier.

The argument wouldn't be worth attention, except that so many people buy into it, judging by the buzz surrounding the upcoming initial public offering for UPS.

Unfortunately, no one can change the market's mind if it's determined to indulge in irrational IPO exuberance. So why not go with it and push a company like PG&E?

After all, UPS may carry 54 percent of e-commerce traffic, but PG&E carries 100 percent of Silicon Valley's electricity. And let's face it, if UPS goes out of business tomorrow, e-commerce would continue in some fashion; but if the power disappears from Tech Valley USA, the Internet would have much larger problems.

Other issues:

  • Qwest Communications
  • (Nasdaq: QWST) Going by the twisted logic often employed by analysts nowadays to explain high valuations, the fourth largest long-distance provider in the U.S. should be worth much more than its current market cap. After all, the company's European joint venture, KPNQwest (Nasdaq: KQIP) finds itself worth almost half the parent, following an initial public offering of American depositary receipts on the Nasdaq.

    I don't know what KPNQwest's asset value is, since companies based overseas don't have to file SEC documents electronically, but a revenue comparison would seem to indicate that Qwest deserves a better stock price.

    In the March quarter, Qwest and KPNQwest posted revenue of $878.1 million and $41 million respectively. Forty-five percent (Qwest's stake in the venture) of KPNQwest's revenue is $18.45 million, or roughly 2.1 percent of Qwest's top line for the quarter. So a business that's 2.1 percent of Qwest's size gets a cap of $13.4 billion, or 48 percent of Qwest's total value this afternoon.

    Not exactly an accurate comparison, granted, but it's as close as you can get without having more data. Regardless of which numerical comparisons you care to use, Qwest obviously is several times larger than its joint venture, yet is valued only twice as much.

    Of course, it's also possible (probable?) that KPNQwest is simply overvalued. But KPNQwest investors don't hear that, and what am I here for, if not to tell people what they want to hear?

  • Home Depot
  • (NYSE: HD) The stock is down because Amazon.com (Nasdaq: AMZN) plans to sell home improvement items, but let's get real -- selling videos and books is one thing, selling radial saws and garden implements quite another. Even if Amazon's shipping costs just $4.95, buying a hammer is a little more touchy-feely than buying the latest novel by Orson Scott Card.

    Amazon believes the hands-on experience isn't as important to casual or new buyers of tools. The website believes that by offering product reviews and buyers' guides, it will appeal to a wider range of do-it-yourselfers. "One of the things we noticed with our electronics and toy stores ... you're (often) buying something that you may not know much about," says Richard Chin, director of product development for Amazon. "Wwe want to make it especially easy for casual customers or new customers who might be buying a tool as a gift."

    That might be a great story, except that Home Depot itself happens to have a pretty good website for home improvement guides. This scenario might simply repeat Amazon's book experience, in which the company didn't hurt Barnes & Noble super stores so much as small bookshops. Home Depot has the resources and wherewithal to withstand Amazon; but the corner hardware store could have more problems. 22GO>