Outlook for AOL and Yahoo!
—December 13, 2000
Provided By CNBC
Bill Griffeth/CNBC: In today's "Internet Investor" segment, AOL today announced it has signed up its 26-millionth customer. This is just days before a likely Federal Trade Commission vote on the company's pending merger with Time Warner, with approval from the Federal Communications Commission following just days behind that. Here's what AOL has been doing compared with the Standard and Poor's 500 Index this year. And, of course, we all know what AOL has done in all of 2000. This is where the deal with Time Warner was announced, and it has all been downhill ever since. The Wall Street Journal's (WSJ) Steve Frank joins us now with more. Steve?
Steve Frank/WSJ: All this comes at a time when some are raising the question of whether AOL's biggest online rival, Yahoo!, may need to give new consideration to a deal of its own. Joining us now to talk about all these issues is Merrill Lynch Internet Analyst Henry Blodget. It is good to see you. Thanks for being with us.
Henry Blodget: Thanks for having me.
Steve Frank/WSJ: First of all, AOL announced that it passed the 26-million-subscriber mark. You suggested in a subsequent note that perhaps the pace of subscription is picking up relative to the same time last year.
Henry Blodget: The way we calculated it, it looks like it's 10% ahead of last year's pace. That would put it slightly ahead of our estimate of 1.8 million this quarter, so it is a good number.
Steve Frank/WSJ: As we pointed out, the deal is expected to close rather soon, by the end of this year or early next year. A lot of folks say we could expect a little pop in the stock when that does happen, but what happens longer term? This stock is not exactly cheap at twice its estimated cash-earnings-growth rate. What do you think happens longer term?
Henry Blodget: This stock has the potential to really become a must-own stock. Obviously, it depends on how the company executes as well as on the overall advertising environment. Clearly, advertising growth will drive a lot of the company's growth. If those things go well—and we'll get evidence in the first couple of quarters that the companies can do a lot together—I think you will find a lot of portfolio managers basically saying, 'Look, this is a stock you've got to own.' It is the same thing they said about Cisco for the last five years. If valuations are not so much at issue, I think it can trade at twice the growth rate. I really think it comes down to how the companies execute first quarter of next year.
Steve Frank/WSJ: Okay, but you see valuation increasing from where we are to two-and-a-half times growth rate, or three times growth rate?
Henry Blodget: I think so. I think as people get comfortable with it (it again obviously depends on the economy and the market as a whole) that the two companies can work together—as we get evidence that there is real synergy, that they are signing deals they couldn't have signed as separate companies—you will see the multiple expand. We don't expect it to be a moon shot, but from this level, it is to be a good investment and we're confident in that.
Steve Frank/WSJ: Let me ask you quickly about Yahoo! Speculation was raised by a rival investment bank yesterday that pressure on the company is mounting to find a partner of its own, something it rejected a year ago at the time of the AOL deal, but maybe now they can't reject.
Henry Blodget: I think, certainly, there are reasons for them to partner. Actually, I think there is a lot of pressure on some traditional media companies, now that AOL Time Warner exists, to make sure they have a great Internet strategy, and partnership with Yahoo! would really help that. I still don't think Yahoo! needs that, clearly given what's happened to the stock and given the online advertising environment.
Steve Frank/WSJ: Does that suggest they have to sell?
Henry Blodget: I don't think you will see them sell at this point. I really do think they feel, and others feel, that we are at a low point here. We are in an incredibly tough environment and, by the middle of next year, we hope things will improve. I think they see it that way as well.
Steve Frank/WSJ: On that optimistic note, thanks for joining us.
Henry Blodget: Thanks for having me. |
