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To: Chuzzlewit who wrote (2)	1/31/1999 10:29:00 PM
From: musea	of 419

Chuzzlewit, I'm going to copy part of your post as a convenience to readers of this one. You wrote:According to my calculations, AOL (currently selling at about $175) had an free cash flow of $.187 per share this quarter. If this were a mature "cash cow" like a utility, could we reasonably assume that the investors would require a multiple of cash flow at say 12x? In that case AOL would need to generate cash flow of about $14.60 per year to support the price, or $3.64 per quarter. That will require a growth in cash flow of 1,850% from now to whenever the company achieves that objective. The company would need to grow its cash flow for 26 consecutive quarters at 60% per annum to achieve that goal. And still, there would be no premium for shareholders, because effectively at least six and one half years of growth have been included in the current stock price. You are positing that an 19.5x multiple of today's cash flow would be required to support a mature company with AOL's current stock valuation. You then go on to calculate that it would require 26 quarters of 60% per year compounded growth rate to achieve that. What if we change the picture somewhat. Let's say that it would be reasonable during these initial stages of growth for AOL to double or triple its cash flow yearly for a few years, say triple for two years (that's 200%) then double for a year (100%) before settling down to 60%. Then at the end of three years, the cash flow would already be at 18x the current rate. I haven't run the exact numbers yet, but it seems like this fairly plausible scenario would yield a much more satisfying set of numbers. Growth at the beginning is easier to achieve, and the front-end loading of the numbers provides a plausible means for AOL to support its valuation. -musea

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