Re: Timing
I agree that the Compuserve deal pumped AOL up one more time. The mantra "more subs...more subs...more subs" propelled AOL up to incredible levels. The problem with this scenario is that when Compuserve subs found out about the AOL marriage, 23% of them jumped ship, and they certainly weren't jumping to sign up with AOL. The stock moved up on positive news, but the "news" turns out to be untrue. The same thing happened two quarters ago when AOL reported positive earnings, and the news made the stock jump up. Then three months later, AOL restated earnings, and the earnings turned out to be losses.
Why has AOL been going up this year? I don't think that it is because thousands of individual investors are sold on the rosy promise of AOL's future. Eighty percent of AOL is owned by institutions--80%! The little guy isn't moving this stock up or down, that's for sure. These institutions have had an enourmous amount of money flowing in, and they need someplace to invest it. There is a limited universe of stocks that are liquid enough to soak up all this cash, and AOL is one of them. It doesn't matter whether the stock is Microsoft, Coca-Cola, or America Online. The money has to go somewhere.
Now, the institutions can't keep all of the money flowing into the same few stocks forever, or the stock prices of a few stocks would go to infinity. So they have to "rotate out" of stocks every now and then. Anything or nothing can trigger the rotation. Usually the stock starts to drop, and then after a while the news or the analysts projections justify the drop. Check out Coca-Cola or Ascend Communications, formerly the darlings of the institutions. The bad news and downgrades on ASND didn't start until the stock had dropped nearly 50%. As the institutions unloaded and moved on, individual investors bought shares, thinking they were buying "on the dip."
I think that it's AOL's turn to drop. It has had a nice run, the institutions have made their money on it, and it's simply time to move out and move on. The excuses will come after the fact, but I think that some analyst will blame "slowing rate of subscriptions" or "negative impact of Compuserve merger" or "Windows 98." But by the time we hear that, AOL will be in the low 60s.
AOL is a $15 stock with $75 of hype. The slide down will be brutal and swift.
John |
