Joe, I agree - and I've seen a higher proportion of bullish comments here since writing that post. Still, I was surprised to see such a significant number of bears following what I considered to be a strong earnings report. The stock closed at $85 7/8 yesterday before the report was issued ($88 was the after hours, post report quotation). So today's move was pretty strong, especially in a weak overall market. Currently it looks like about 60/40 bulls to bears here. I still would not consider that wildly bullish, particularly compared with the typical SI thread.
AOL has a market cap of about $20 billion, and seems likely to show operating cash flow of about $1 billion this calendar year (reported $214 million in operating cash flow this quarter). That gives AOL a high, but not excessive valuation, IMO. One of the great things about AOL is that its marginal costs are fairly low - each new subscriber adds very little to its overall expenses. Contrast that with say, a steel company - to expand production there, typically they will need new facilities, new furnaces, additional workers, more iron ore, more coke, etc. For AOL to expand capacity, they mainly need to add a few more modems, a few phone lines, perhaps a bit more "big iron", and they are ready to go. Thus a large percentage of AOL's future revenue growth should find it's way to the bottom line.
If AOL adds 4 million new customers at $250/year (probably can be acheived within 2 years) , that's an additional $1 billion in revenue/year. And on top of the subscriber revenue, there's advertising revenue. As AOL's subscriber base grows, they should be able to charge more for each ad. Then there are the co-operative ventures (such as the deal with Tel-Save long distance), and various other ways to sell even more to customers, including "premium" services (Games and such? Who knows, this is all such a new area, its hard to predict). Of course, AOL still has to execute on these plans. Assuming they do it reasonably well, I feel the current price can be justified. |
