Yeah, Ax.B's 'valuation' approach is unbelievable. As I posted with
numbers a while back (and updated below), the comparisons to cable
are alone invidious and ridculous.
Ax.B's 'hybridizing' that with comparative price/sales ratios is
even worse.
- Yahoo et. al. do not engage in development of content nor
extensively in payment for it.
- That they trade at 10x sales reflects faster growth of their top
line. AOL's latest quarter over quarter growth was 9.6%;
YHOO 21%, XCIT 52%, LCOS 18%.
The six year range of AOL's PSR (trailing 12 month sales) has been
0.9-6.0, with average of 2.9 and median of 2.4. At its 30 day
average price of $82.50, AOL's PSR is 5.28
More importantly, comparing price-sales ratios of Internet stocks
is like weighing deck chairs to figure which would sink fastest.
-------------------
$/per sub valuation as used in cable is shorthand for multiple of
current cash flow. Today that multiple is around 10.
Also, cable cash flow multiple valuations are of private market value.
The stock prices of publicly cable companies trade at discount to
that. The historical average has been 20-25%, although during the
past year or so, the discount has been running 35%.
The October 06 CableVision magazine, bible of the industry, presents
national average per-sub financials for cable. The tables below use
that revenue and EBITDA data to value the average cable system as if
it had AOL's subscriber base and shares outstanding but cable's cash
flow, and compares that to AOL's actuals.
Depending upon the method employed, AOL is worth between $1.84 and
$16 per share; while cable valued as if were AOL is $114 per share.
Obviously, either valuing AOL via cable methodology is not
appropriate, or AOL is vastly overvalued. Perhaps it's somewhere
in between. But it is certain that more clarity is needed about
extent to which AOL's valuation story should be of earnings or of
cash flow.
annual per sub
CABLE AOL
REVENUE $ 424 $ 243 = 12 x reported Q4 97 average monthly/sub
$16.77 access+$3.47 ad/commerce
------------------------------------
EBITDA $ 184 $ 3 = 4 x Q497 $6.7m/9m subs
------------------------------------
10 x EBITDA $ 1840 $ 30
------------------------------------
x 9m subs $16.6b $0.27b
------------------------------------
/116m shares $143/sh $2.30/sh
------------------------------------
20% Discount =
Public Mkt Value $114.25/sh $1.84/sh
========== ========
Obviously, the above result for AOL is out of whack, even for the
most ardent bear. The traditional method does not fully allow for
significant expansion of cash flow. The discounted terminal value
method does.
Reflecting the most optimistic expectations, one of AOL's
investment bankers (RS) recently stated:
"We estimate operating cash flow per share can
approach $1.75 in F1998 and $2.05 in F1999"
Despite the hedging of "approach", the table below uses those
values for 1998-9 and increases thereafter by the same 15% as in
AOL's underwriter's 1998-9 estimates. For simplicity, shares are
kept constant and debt is not subtracted.
FY 1998 1999 2000 2001 2002 2003
EBITDA $203m $232 $267 $307 $353 $406
% change Yr-Yr 0% 15% 15% 15% 15% 15%
10 x 2003 Value $4.1b
1998 12% Present
Value Terminal Val $ 2.3b
/116m shares
= Private Value $ 20/sh
20% Discount $ 4
= Target Public
Market Value $ 16/sh
========= |
