Allen,
First, AOL's stock price got a bump up to 27 when the PPI and CPI figures came out last week (suggesting weak inflationary pressures). The whole market rallied and has been bullish ever since. Then, AOL was "relaunched" on the NYSE with massive hype. That plus positive comments by AOL's CEO sent the stock to 30. Today (9/19), Merrill Lynch raised its earnings estimates for AOL to 16 cents a share for its first quarter (ending in September). That raised AOL's stock price to 33.
I think that this is as good as it gets for AOL. All of the major long distance carriers now offer inexpensive internet access (e.g., AT&T, MCI, and Sprint) as well as many of the regional Bell operating companies (PacBell, Atlantic Bell, etc.). AOL also has to compete with CompuServe, NetCom, and local ISPs. No one will make any money from providing internet access with so many competing vendors. AOL is trying to generate other sources of revenue (e.g. advertising; they just announce $27 million in advertising contracts with Reebok, Pepsi, etc.) but the bulk of their revenues come from subscriptions. While AOL may continue to grow, their growth rate does not justify a P/E multiple of 100. This stock is already 80 percent owned by institutions. It has nowhere to go but down. When AOL announces its first quarter earnings, it (1) had better meet or beat earnings estimates, (2) show better retention rates (i.e., lower churn rate), (3) show strong revenue growth, and (4) be well on its way to achieving its target of 10 million subscribers by the end of the year. If AOL fails in any of these catagories, AOL will take a tumble just like it did in the last quarter.
JW |
