All, here is an article on AOL from the WAshington Post...
washingtonpost.com
AOL Time Warner Is Doing Just Fine, if You Ignore the Numbers
By Jerry Knight
Monday, February 5, 2001; Page E01
AOL Time Warner Inc. fed reporters sandwiches and sanguine predictions last Wednesday, then spent the day spooning out statistics and spinning superlatives to Wall Street analysts.
Ours is the media marriage of the millennium, executives of the freshly merged company boasted, never mind the billion dollars we lost last quarter.
Nice try, folks. Too bad Wall Street didn't swallow it.
Too bad for AOL Time Warner's shareholders, that is.
They lost almost $30 billion last week as AOL stock fell four days in a row. The shares closed Friday at $47.79, down 12.5 percent since Monday.
The drop must have surprised a lot of AOL shareholders because the initial sound bites and the superficial analysis largely reflected the spin induced by AOL's daylong dog-and-pony show.
Analysts and reporters generally bought the idea that the $1.1 billion fourth-quarter loss didn't matter -- because pre-merger write-offs were expected -- and most agreed that the company's operating income last quarter was pretty much on target.
Wall Street's most enthusiastic AOL cheerleaders repeated their endorsements of the stock. "Strong buy," CIBC Openheimer said. Still a "buy," repeated J.P. Morgan & Co.
Merrill Lynch & Co.'s Henry Blodget went a step further, declaring that AOL Time Warner is now only an "above average risk" investment, not "high risk" like other Internet stocks.
Upgrading the risk rating of a stock that's in the midst of a 13 percent plunge might strike investors as a bit out of touch, but nothing would surprise anyone who saw Blodget on "60 Minutes II" last week.
CBS held him up as an example of Wall Streeters who've never met a stock they didn't rate "buy" or better. Priceline.com, when it was approaching $95 a share, still was headed up, Merrill Lynch analysts were saying a year ago. Now it's less than $3. Amazon.com at $90 a share -- buy before it goes higher, Blodget said. Now it's $14 and change.
AOL may be the last stock still lusted after by the Internet stock nymphomaniacs, but most investors have turned prudent -- even prudish -- about technology companies, especially the ones that practice "Internet accounting."
In Internet accounting, the bottom line is not the bottom line. The bottom line -- how much money the company made or lost under generally accepted accounting principles -- is not what matters, say AOL and its ilk. What matters is operating earnings, how much money the company made if you ignore warts such as interest, taxes, depreciation and hundreds of millions in bad investments.
In AOL's case, the biggest thing they'd prefer to ignore is the more than half a billion dollars the company had to write off because the value of its investments in other companies has declined.
Ignore, too, please, the $16 million spent arranging the AOL Time Warner nuptials. It was only the down payment anyway; there will be more next quarter.
Some analysts, in fact, are willing to ignore almost all the numbers in the AOL Time Warner financial report and look ahead at what the company projects for the rest of the year.
The logic is that stock prices are really based on the future, not the past. What matters is not how well the company did last quarter or even how well it is doing this quarter, but how well it will do later in the year.
This is the issue that divides the bulls and the bears on AOL. Based on what happened to the stock this week, the bears are making a more persuasive case.
AOL officials acknowledged that business is slow now because the economy is weakening and advertising spending is off. The company's revenue is to rise about 10 percent this quarter, with the take from advertising and commerce growing faster than overall revenue.
First-quarter earnings will grow 18 percent to 19 percent, they projected. That's earnings the way AOL likes to think of them, ignoring the realities of interest, taxes, depreciation and amortization.
But later in the year, business will take off. Revenue will grow twice as fast and AOL-style earnings will grow 30 percent.
The AOL bulls believe that. The AOL bears say it's bull.
That dispute is the key factor not only in the price of AOL Time Warner stock, but also the prices of hundreds of tech stocks.
Even after last week's 4.4 percent decline in the Nasdaq composite index, tech stocks as a group are up 25 percent to 30 percent since Jan. 2. That would be a good gain for a good year.
Part of the reason for that unprecedented climb is that stocks are rebounding from irrational lows at year-end. A lot of investors sold depressed stocks during December to take tax deductions, driving hundreds of stocks to levels that made no fundamental sense.
But tech stocks were down last year for good reasons. The Internet bubble had burst. The air had gone out of the only slightly less overinflated telecom sector. Orders for computers, chips, software and communications equipment were falling because the economy was slowing down, the threat of a recession looming.
The January resurgence of tech stocks meant investors were looking a long way ahead, Merrill Lynch tech stock strategist Steven Milunovich said in a memo Wednesday. While consumers are worrying about the slowdown, tech investors are looking beyond the slump, assuming that the economy will have a "soft landing" and recover later in the year.
Maybe that's getting ahead of the game, Milunovich suggested.
Earnings of tech companies are going to remain in the trough for a couple of more quarters, he said. It's premature to be bidding up stocks in anticipation of a rebound when the cycle is still falling and no one can see the bottom.
Last week's decline in tech stocks suggests that a lot of investors agree with Milunovich's cautious view.
Yet the assumption of a soft landing and a rapid rebound is built into all of AOL Time Warner's projections for revenue and earnings growth for the rest of the year, and also into all the "buy" recommendations of analysts touting the stock.
It's an awfully big assumption, considering that economists are still divided over the prospects for a recession.
The rosy scenario question is probably the single most important reason for being skeptical of AOL Time Warner's growth prospects for the rest of the year, and the single most important reason why the stock was down so much this week.
But there are other factors that raise red flags with some AOL Time Warner watchers.
The quarterly report exposed weaknesses in the Time Warner side of the business, which produces most of the revenue but is growing more slowly than AOL. In the fourth quarter of last year, the movie and music businesses were down. Magazines, like all media, are facing a falloff in advertising.
Some analysts suspect that AOL's ad picture doesn't look very good, either. In the past, the company has disclosed in quarterly reports how much of a backlog of advertising it has. The number was a way of assuring investors there was plenty of business coming down the pike.
Last week, AOL didn't reveal its ad backlog. The explanation was that the number is no longer relevant in the combined company. If the backlog were good, AOL would disclose it, skeptics argued.
Nor did the company disclose how many stock options it is issuing to employees as part of a plan to give Time Warner the same stock deal that has long been loved by AOL employees. Time Warner's top dogs used to get big cash bonuses, which cost the company money. Stock options aren't cash and don't show up as an expense. But giving away options does water down the value of existing shares.
Stock options are another case in which skeptics assume that if the company isn't disclosing something, it's probably not good.
Another nagging doubt is whether AOL Time Warner will be able to save its cable business channel, CNNfn, which has been unable to compete with CNBC. (Full disclosure here: I do a daily Washington Post business report on Washington's WRC, Channel 4, which, like CNBC, is owned by General Electric Co.)
They're changing the CNNfn name to CNN Money and changing the concept from all business, all the time, to personal finance at night after the markets close. But the audience for TV business channels is falling fast as the market cools. So is advertising.
Advertising revenue is the Big If in all the projections about AOL Time Warner's revenue for the rest of the year and, ultimately, the value of its stock.
In Wednesday's sessions with analysts and reporters, AOL Time Warner executives said they are in a better position to deal with a downturn in advertising than other media companies. If we can't sell ads, they said, the unsold air time, magazine pages and Web space can be used to promote our other ventures.
But running ads for AOL on cable channels or putting Time magazine subscription banners on AOL is a paltry substitute for paying customers.
The idea of using all the different AOL Time Warner media to promote each other -- spelled out as a grand strategy this week -- generates some skepticism. It easily could deteriorate into too much of a good thing, like the repetitious round of promotions for other shows that fill in the spaces between programs on cable channels that don't have real ads.
© 2001 The Washington Post Company |
