William (and all), I too am perplexed by AOL's recent runup despite its 385mil charge. In finance classes they tell you that the market is rational and efficient. IMO that applies to the long run. In the short run, the market is ruled more by perception and emotion.
Todays WSJ has an article about AOL modeling itself after the cable companies, and feels that it should be valuated by the same model, here's an excerpt:
Many investors appeared to like the revamped AOL. Its stock rose
$1.875, or 7.3%, to $27.50 in New York Stock Exchange composite
trading Wednesday, after gaining $1 on Tuesday, though some
observers said the rise was prompted in part by short-sellers buying
shares to cover their bets.
But is the cable comparison apt? The fact is, the cable industry and
on-line services have some fundamental differences. In the long run,
AOL may have a tough time persuading Wall Street and investors to look
at it in this new way.
Like AOL, cable companies a decade ago were struggling to attract both
advertisers and compelling programming. Naysayers predicted they
would never make much headway against the Big Three established TV
networks. Eventually, the naysayers were proven wrong, and ads and
interesting shows now flow freely.
Yet cable operators historically had no competitors in their local service
areas, while AOL is beseiged by competition. Cable was available in far
more U.S. households a decade ago than the estimated 25% of homes
that have modem-equipped personal computers today. Moreover, cable
tapped into an established TV-advertising market and a TV-production
industry; on-line ads remain in their infancy, and no one is sure what
on-line programming should look like.
Additionally the article mentions that the cables are valuated on their positive cash flow- which AOL does not have. AOL will survive, but not at its lofty P/E.
Regards, John |
