America On-Line: will it survive ...? Message Board

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Technology Stocks : America On-Line: will it survive ...?

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To: Thomas P. Friend who wrote (3242)	5/28/1997 10:29:00 AM
From: Harry Larson	of 13594

Nice post! The real issue is valuation, not zero or infininty as the polarized discussions imply. At 55 AOL is trading 65 times FY 98 concensus; which is 30% above the concensus five year earnings growth rate. At the least the current valuation allows for no mistakes or shortfalls. In fact, what scares me most is that underlying much of the bullishness is perspective that AOL is invincible -- that it has perpetual corner on everything from knowing what consumers want, to how to package and market it to them, to creating appealing content; and that it's insulated from external factors such as plateaus in rates of growth of home PC penetration or of Internet advertising. What matters far more than whether the subscriber base will erode is at what rate it can grow. >the day when the switch to the internet reaches critical mass >is not imminent. The average person is not ready for it. The average person isn't even ready for AOL. And surveys are showing that rapidly increasing percentage of newbies are gaining their first online exposure via the Internet at work and school. As AOL has shown, people tend to stick with what they start with. In that regard, the Feds' plan for $2.5b to bring access to schools is not good for AOL. >improving advertising revenues The bullish case views these as if unlimited. 1) The heavy teen demographic of usage and its focus on chat is an obstacle 2) There's only so much advertising and merchandising that can be done before logging on is like opening a Publishers' Clearing House mailing. 3) Increasing competition for advertisers is squeezing margins. AOL already has 100 people dedicated to ad sales, up 50% in the past six months. BTW, the Tel-Save deal has sold AOL's most of AOLs most valuable real-estate (logon pop-up) for the next three years. All the attention on advertising loses sight that `merchandising' revenue has been twice the size. AOL could have its lunch eaten there. Just one example is CUC Int'l, which yesterday announced merger with HFS, has been selling online since 1979 (including via AOL since it began). In December alone it sold $90m of merchandise. AOL did $26m in the entire December quarter. Lost in the focus on AOL's marketing and advertising finances has been that its development expenses have been increasing at high double-digit rates (though they have remained fairly constant as percentage of revenue). Yet even Q3's annual run-rate of $100m is a spit in the ocean of capital (and talent) chasing the same things on the Internet. To be sure, AOL subscribers can access it all. But when doing so they leave the advertising and merchandising space controlled by AOL

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