AOL on Barron's. "I look at the big telcos more as
potential buyers [of AOL] than competitors". The fllowing is from Barron's:
Q: Let's talk about the Internet. Aside from the companies
building the infrastructure for it - Cisco, Cascade, Ascend
- it's been a nearly impossible place to make money.
Force: I believe in the pipe. The Internet has clogged the
pipe. As a result of the Internet, we need more switches and
more routers and more concentrators. The Internet is not
going away. It's going to be the major communications tool
for corporations and consumers. But I've got a list here of
Internet-related IPOs; there are about 35 of them. I don't
own any.
Q: Skeptical, are we?
Force: We have this silly discipline - we only want to own
companies with revenues and earnings. Most of these don't
have either. We'll buy some things that other people think
are overvalued, like Ascend - the equipment play is so
clear. But I don't know who the content providers are going
to be at the end of the day. I don't know which Internet
service providers will be there. And it's not clear who the
electronic commerce winners will be. The accidents in this
group are mounting at a rapid rate. It leaves you with
Microsoft and Netscape, AT&T, MCI and Sprint, plus Cisco,
Cascade and Ascend.
Q: Chip, do you own anything on John's Internet list?
Morris: A few. Admittedly, the only two groups who've made
money from Internet stocks are the investment bankers
bringing all these deals public, and the flippers who buy
stock on the IPO and immediately sell them.
Wick: And the venture capitalists.
Morris: Oh, right. Three groups. We portfolio managers have
only ourselves to blame. We permit these companies to come
public at valuations that aren't supported by fundamentals.
At the same time, the Internet represents a basic shift in
the role of the PC from a computational device to a
communications tool. That's going to have positive
implications for the entire industry.
Q: How do you play it?
Morris: The battle for the server and browser markets is
essentially over. Microsoft and Netscape will split those
markets. What's left is content creation. Given the weak
performance of those stocks, we've started nibbling. We've
been buying Intuit again. And America Online, which is
becoming the largest Internet service provider in the world.
Q: A dubious distinction, given the trouble people have had
in that business.
Morris: We're making a fundamental bet that AOL has shifted
its business to a cable TV model. Microsoft seems to be
heading the same way. Remember, the Microsoft Network was
essentially supposed to die. And all of a sudden, it isn't
going to die anymore.
Q: What do you mean, ``a cable model''?
Morris: AOL and Microsoft are going to build big businesses
selling basic access, and offer packages of specialized
services. I know they've talked with people like Dow Jones
about a financial-services tier, where they'd bundle
Internet access with things like The Wall Street Journal's
Web site, Intuit financial services, and maybe real-time
quotes, and charge a premium above basic access.
Q: Does AOL's role as a content creator go away?
Morris: They'll be both creator and packager, much the same
way as ABC is a creator and packager.
Q: But if you're a content creator - ESPN, or
104Barron's106, or the Weather Channel - why cast your lot
with AOL or MSN? Why not just throw your site up on the
'Net, and wait for the surfers?
Wick: To cut through the clutter. The Internet is so vast,
there are so many locations, that if you can have someone
like AOL shepherding people to your site, it could mean the
difference between significant traffic at your online site,
or virtually none.
Q: What other Internet stocks do you own?
Morris: Intuit. Checkfree. And Premenos, which focuses on
electronic data interchange, or EDI.
Q: Premenos shares just got cut in half, after it badly
missed the quarter, and the CEO resigned.
Morris: We bought all that we could on the break. Financial
services will be one of the earlier commerce applications on
the Internet. We started buying Premenos at two times cash;
now we can buy it at 1 1/2 times. And they're profitable.
Premenos sells software that lets companies do electronic
data interchange with their customers and suppliers,
swapping information on pricing, ordering, and billing.
Q: The concept has been around for a while.
Morris: But it's been expensive. Traditionally, EDI involves
service payments, where the companies give the software
away, and collect ongoing fees. Premenos is trying to turn
that around, selling the software and allowing unlimited
use. If a company came public with no business, and wasn't
generating 50 cents a share in earnings from its core EDI
business, and didn't have $50 million in cash, and just said
they intended to do EDI on the Web, they'd end up with a
$200 million market cap. That's three times the market cap
of Premenos.
Q: What about you, Paul, any Internet picks?
Wick: We own some America Online. I agree with Chip about
the viability of the business. The bears argue that access
is a commodity, and AT&T will eat their lunch. But AOL is
the best marketer in the industry, which is why they cleaned
the clocks of Prodigy and CompuServe. Plus, they're
advertising revenues are going to be quite significant.
Chip, it's in excess of $200 million a year, right?
Morris: Right.
Wick: They lump ads and transaction revenues together. In
any case, it's becoming quite significant, and it's
high-margin revenue. Overall, AOL has a run rate of about
$1.5 billion in revenues. The market cap is about $2.3
billion. So you have a dominant company in what's still a
sexy industry, turning the corner fundamentally, trading at
a little over one-times revenues.
Morris: Telecommunications costs eat up around 25-40 cents
of every non-advertising revenue dollar AOL generates,
depending on how traffic is carried. If you're Sprint or MCI
or AT&T, you could buy AOL and immediately make that
business profitable. I look at the big telcos more as
potential buyers than competitors. |
