Thomas: Happens I was working on something just for you along these very lines when you made this post.
You're not using the tools that growth investors use to evaluate stocks. You're using the tools that should work when looking at GM. You and Peter Lynch (CNN Wed. eve.) would agree that Coca Cola is overvalued at 40 times earnings. Heck, I agree. But I still wouldn't be foolish enough to short it. Intel, your repeated example, suffers from the same shortcoming, though not in as pronounced a manner.
You might be interested to know that I bought INTC at 56 in Jan. 96, but sold it this Jan. for 143 because it had become the single stock owned by more mutual funds than any other. I hate it when everyone loves a stock after it has gone up. Sure enough, downgrades started a month or two later and the Cisco and US Robotics that I bought with my profits leave me thousands of dollars better off.
Enough of that aside. What's your calculation of enterprise value for AOL?
I made a suggestion in one of my posts here a month ago that the price to play in this game, whether you buy or build, looks like it has gone up to the multibillion-dollar range. Just to build a piece of a consumer network the size AOL already has in place, Microsoft is willing to spend $1.5 billion on Comcast and WebTV. Throw in marketing and content and other acquisitions to duplicate the customer base AOL has today and I don't see how you can expect to get away for less than $3 billion to $4 billion. The true figure could also be a couple times higher, but we're trying to establish a floor here.
Fiddle with my numbers all you want. Can you get it down to $2 billion? That still leaves you off by 25 percent to 50 percent. Ouch.
Let's look at it another way, again taking into account that AOL is not GM, but a growth company -- and not just a restaurant concept growth company, but a growth company within a hot growth sector. If AOL continues to progress, at some point it enters that idyllic zone where fixed costs are all covered and economies of scale mean that major expansions of revenue entail very small increases in variable costs. It is possible that they entered that zone in the last few weeks.
What happens to your calculations if AOL is able to double revenue in the next two or three years, with 40 percent to 50 percent flowing straight through to the bottom line. Remember, in good years, there are tech companies achieving those margins on their entire revenue base. Estimate a 30 percent growth rate over the next three years, give them a little haircut for smoke and mirrors on last quarter's $450+ million reported revenue and 46 percent annual growth rate, and we could be easily be talking $3.5 billion to $4 billion in revenue, with $1.5 billion to $2 billion of that as new revenue with fat profit margins attached. On 100 m shares outstanding -- is my math right, I can't believe my eyes -- that could be $6 to $10 a share. Holy Toledo. With that kind of profit growth, we can give them at least a P/E of 30. Heck, the market as a whole is near 20 today. That may be a $300 stock in the year 2000. Oh -- my -- God!
Sure, this is real back-of-the-envelope stuff. But with the Internet still in its infant stages as an emerging technology there is a lot of room for upside surprises that could cancel out a long list of negative factors I may be leaving out. I think I started with numbers toward the low end of what is possible, given the kinds of performances we've seen in the past from many, many tech companies.
I'm happy to be sitting here with a 70 percent gain in the space of a year and with a range of potential scenarios facing me that range from my wild guess of a median probability that would get me to $300 in three years, down to your bearish scenarios and those even more catastrophic. I consider your forecast to require some extreme and immediate changes in observed trends, which isn't what usually happens. So, being charitable, I can only give it and all the other scenarios for a plunge back below 20 in AOL shares during the next year a 10 percent probability. If the next earnings statement is at all in line with the recent stock action, I expect your particular scenario to drop to about 3 standard deviations out, which if I remember my statistics would give it a practically meaningless probability of 1 percent or less.
Have you gotten any of that life insurance we were talking about, yet? <G> |
