Here's the May 6 Internet Stock Report at Yahoo, on AOL:
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Morning Report
Cha Ching, Or Ker Plunk?
AOL Earns Its Two Cents Worth
By Steve Harmon
Senior Investment Analyst,
iWORLD.com
"Where Wall Street Meets The Web"
[May 6, 1997] AOL eked out $0.02 earnings per share for its
third quarter ending March 31. Wall Street went ballistic,
pushing the stock up $4.25 to $51.50 per share. But don't
e-mail the bearded ladies investment club just yet on this
one--the income resulted from savings in marketing costs,
while subscriber growth was flat at 8 million as AOL pays
penance for plastering sign-up disks everywhere but the
Hale-Bopp comet.
And for a company booking well north of a run rate billion
(almost two) in sales, getting from two cents worth to anything
near the $0.77 EPS we think AOL could garner for entire fiscal
1998 (ends next June) won't be easy.
Challenges ahead: infrastructure costs of $700 million the next
four years, increased pressure from the Web's open standards vs.
AOL's proprietary ones, demand from advertisers of "quality"
vs. "quantity" page views, consumer resistance to AOL's
"kamikaze" commerce sales methods--flashing item for-sale
screens to eyeballs before a user even reaches the start page,
and telco and cableco entry into Internet services--to name
a few tidbits.
Logging AOL's Numbers
AOL (NYSE:AOL)
Valuation Estimates
Shares outstanding 3/31/97 113.79
x Share price 5/5/97 $ 51.50
= Market capitalization $ 5,860.13
- Negative working capital $ (162.90)
= Enterprise value $ 6,023.03
Sales and Loss
Quarter ending 3/31/97 sales $ 456.19
Quarter ending 3/31/97 income $ 2.64
Quarter ending 3/31/97 EPS $ 0.02
% Revenue from subscriptions 84%
% Revenue from ads/commerce 13%
% Revenue from ANS, other 3%
Fiscal 1998 (June) sales estimate $ 1,950.00
Fiscal 1998 (June) EPS estimate $ 0.77
Enterprise/sales 3.1
Price/earnings 66.9
( ) = negative
All figures in millions except price
per share and multiple
c 1997 Mecklermedia
iWORLD Financial Network
By The Numbers
Third quarter revenues jumped 46% over the previous year to a
record $456.2 million, with nonsubscription revenues tripling
to $74.7 million. Advertising and electronic commerce revenues
rose $60.7 million vs. about $15 million 3Q 1996. Advanced
Network Services (ANS), the backbone for 40% of all AOL
traffic, by default accounted for the remaining 3% of sales,
although AOL doesn't show it broken out on its own.
Significant? Rumor had it that AOL may consider spinning out
ANS. Assuming ANS maintains its 3% of sales position, on a
projected fiscal 1998 $1.95 billion overall company sales,
ANS could generate about $60 million. Will ANS be spun?
Not likely if current comparables hold up--backbone PSINet
NASDAQ:PSIX trades at about 1x sales. Rival Prodigy just
raised about $200 million privately so perhaps AOL could go
that route for ANS.
Net Net
While AOL should be commended for its strong growth and
leadership in the online and Web space, the question boils
down to valuation: at 67x next year's estimated earnings--
even 60x--AOL could be frothy, for the reasons noted above
and subscriber saturation in the U.S. Overseas growth could
be huge, but so could the resulting overseas telecom and
marketing costs associated with it.
On the plus side, while many analysts think access, which
accounts for a large majority of AOL revenue, is a
commodity--and we agree that it is--AOL's combination of
access WITH accessible content, commerce (as frontal as
it is), and services is exactly the kind of model pure
Web firms like Netcom (NASDAQ:NETC) envy. Creating this
"value chain" may prove difficult to duplicate--ask MSN
and CompuServe.
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