A little support to your "buy"...From H & Q
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**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: America Online, Inc.
Price: 94
Recommendation: Buy - Focus List
Notes: f
Date: 12/14/99
Poised for the New Millennium - Our Meetings With Management
* We came away from our recent meetings with management with added confidence
in AOL's ability to continue to execute at a very high level.
* We expect the company to report strong holiday shopping results in the first
half of January and to report strong Q200 earnings results on January 19th.
Additionally, we see no signs of a slowdown in subscriber growth.
* We see a number of additional catalysts throughout the first half of 2000
and beyond, including the roll out of DSL service, the launch of new AOL
Anywhere offerings, additional partnerships with major off-line brands, and
further expansion internationally.
* Reiterate BUY - FOCUS LIST recommendation.
1999 A 2000 E 2001 E
Q1 REVS $999M $1,467a $NE
Q2 REVS 1,147 1,541 NE
Q3 REVS 1,253 1,628 NE
Q4 REVS 1,377 1,816 NE
FY REVS 4,776 6,452 8,314
FY EPS $0.17 $0.32 $0.44
CY EPS 0.26 0.38 NE
CY P/E 362 247 NE
FY Ends Jun Current Price $94
52-Week Range $96-22 Market Cap (B) $231
Shares Out (M) 2,460 Book Value/Share $1.57
Net Cash/Share $0.72 AOL Subs(M) 19.0
Adv. Backlog(M) $2,038
Summary: Over the last 10 days, we have met with the management of AOL on
two separate occasions. We have come away from these meetings with added
confidence in management's ability to continue to execute at a very high level
going forward. We continue to believe that AOL's core business is tracking
well and that ongoing initiatives such as broadband (i.e. DSL) and AOL
Anywhere will gain significant steam in the first half of 2000. We also
continue to be impressed by management's ability to monetize its various
assets - from leveraging its large membership base with a highly successful
Shop@AOL commerce offering to the $100 million in revenue backlog at ICQ after
acquiring it 18 months ago. As a result, we believe that AOL is on track to
report strong results from its holiday shopping initiative; we expect initial
indication of that performance in the first or second week of January. We also
expect the company to meet or exceed our Q200 revenue and EPS estimates of
$1.5 billion and $0.07 when it reports quarterly earnings on January 19th. We
believe strength in the quarter will come from continued growth in subscribers
and increased activity of the AOL membership on the service.
We believe that AOL is well positioned heading into the new year. We expect
continued growth throughout 2000 as AOL's membership base continues to grow,
as new DSL services are rolled out, as its international operations expand,
and as the AOL brand becomes more fully and widely integrated into the on-line
and off-line lives of consumers. As such, we reiterate our BUY-FOCUS LIST
recommendation on the shares of America Online.
Beyond the holiday online shopping season and Q200 earnings results, we see a
number of additional catalysts throughout the first half of 2000 and beyond,
including.
Broadband - Together with its local phone partners (currently Bell
Atlantic and SBC, with additional partner announcements expected), and
utilizing its AOL Plus broadband interface and new backend infrastructure, we
expect AOL to begin to roll out DSL service to consumers starting in the first
half of 2000. We believe that AOL is taking the smart route here by diligently
testing and tweaking the service in order to deliver an exceptional customer
experience when launch does occur. We believe AOL is uniquely positioned to
benefit from the desire of online users to access the Internet over broadband.
And we believe, in light of the overwhelming success of adoption of the new
AOL 5.0, that the company will be successful in migrating AOL dial-up users to
its DSL service.
Internet Appliances (AOL Anywhere) - We expect AOL to make several
significant announcements in the first half of 2000 relating to its AOL
Anywhere initiative. Significantly, we expect the company to premier its AOL
TV service at the Consumer Electronics Show 2000 on January 6th in Las Vegas.
The service is expected to incorporate many of the familiar AOL 5.0 services
such as email, messaging, and calendaring with digital television services
such as digital programming guides. We also expect AOL to further its reach
into the Internet appliance market in the new year with new services for
wireless devices and PDAs.
International - We view AOL's opportunity overseas to be significant and
growing. The company's partnerships with Bertelsmann in Europe and the
Cisneros Group in Latin America have enabled AOL to launch successful local
services in select international markets. In fact, according to Media Metrix's
first European Internet audience survey, AOL ranked in the top five of all
sites in Germany, the U.K., and France. We believe changes in the telephony
pricing model in Europe (which increasingly mirrors that of the US) bodes
well for the expansion of AOL services throughout Europe. AOL also continues
to expand in other regions, recently launching its first service in Latin
America in November with AOL Brazil. We expect the company to continue to roll
out service in other international markets throughout 2000. For instance, we
expect AOL to expand its Latin American operations outside of Brazil in the
first half of 2000 into Mexico and Argentina.
Off-line Partnerships - We are not surprised by recent press regarding a
possible AOL/Wal-Mart partnership. Such a deal would be consistent with other
recent deals between AOL and other major off-line consumer brands such as
Gateway and Blockbuster. As we have previously said (see our Research Note
dated November 4, 1999), we see these transactions as shrewd moves by AOL to
dramatically increase the company's presence in the everyday lives of
consumers. These arrangements also represent an evolution in the distribution
of AOL services (from carpet-bombing diskettes, to OEM bundling and Microsoft
browser integration). While no deal has been signed, we believe a partnership,
if consummated, would represent a positive for AOL's brand as it would drive
future membership and revenue growth. By partnering with a major off-line
consumer brand like Wal-Mart, AOL can gain significant exposure in Wal-Mart's
3,600+ stores and to the approximate 100 million shoppers walking through
these stores every week.
Reiterate BUY - FOCUS LIST recommendation.
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at
this time and are subject to change. We do not undertake to advise you of
changes in our opinion or information. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market, as a market maker,
or otherwise. In addition, we may perform or seek to perform investment
banking services for the issuers of these securities. Most of the companies
we follow are emerging and mid-size growth companies whose securities
typically involve a higher degree of risk and more volatility than the
securities of more established companies. For these and other reasons, the
investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. This report is not a recommendation or a solicitation that any
particular investor should purchase or sell any particular security in any
amount, or at all.
on suitability considerations, please contact your account executive.
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(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
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(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
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beneficial ownership of more than 5% of the outstanding equity securities of
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(h) Hambrecht & Quist acts as a financial advisor to this company.
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