Hello Mr. Beal, without being quite so flippant as above I would like to offer
some personal observations about some of your recent posts.
AOL is not a "greater fool" stock or a story stock, but rather a standard issue emerging
growth stock with the opportunity -- hardly guaranteed, of course -- to deliver a classic
hockey-stick shape growth curve in profits. Given the company's investments in
infrastructure and current minimal profits, further growth in subscribers and advertising
revenue should require relatively limited new variable cost outlays. Gross margins on
any/all new revenues should be extremely high, allowing a rapid growth in earnings
beyond 1998. The debate on this stock centers on whether it can maintain its growth
momentum and whether management has the discipline to fully exploit the potential
economies of scale so that a large proportion of new revenues flow directly to the
bottom line.
Your focus on 1998 earnings estimates alone ignores the potential existence of the
hockey stick handle (a mistake other investors have not been making ever since the
Tel-Save announcement). By refusing to look at the whole picture what you've done isn't
analysis at all, it's merely spouting a personal opinion. (In addition, you misuse the whole
concept of P/E valuations, since every company with $1 per share of earnings is not
supposed to trade at the exact same price, but rather can trade at different prices
depending on what their anticipated growth rates are two and three or more years out into
the future. Indeed, my expectation is that if AOL can get to $1 per share of earnings it will
have the momentum to continue quickly on to $2, $3 or $4 per share, giving it plenty of
upside from this level at a very down-to-earth future P/E.)
As for competition, I'm not sure if a redesigned, redesigned MSN is a more formidable
competitor than CompuServe was a few years ago, when it had far more subscribers than
AOL and was the service that I personally preferred (whatever that's worth). AOL
management, for all its faults, has shown a resiliency and competitive tenacity that bears
continue to underestimate. Looking ahead at the next 10 to 20 million households that will
sign up for online services, as things stand today most of them would choose AOL for the
simple reason that often makes market share leaders so hard to topple: "My
neighbor/friend/co-worker/classmate has it, so if I have any problems I can just ask them."
(Read the Moore "Chasm" series of books that are the bibles of tech marketing: note his
discussion of generic vs. whole products and the motivations of visionaries vs. mass
market, pragmatist buyers.)
Finally, it seems to me that the bears here are hoping for something fairly extraordinary to
happen. All the great hype/fraud stocks (Iomega, Presstek, Bre-X, Spectrum Information
Technologies and ZZZZ Best) gave the bears one chance to make their money. After that
everyone knew the game was up. Here, we have quite a few people who seem to think that
AOL is just a bunch of hot air, it fell back to earth once, and now it is in the process of
obligingly doing it all over again for anyone who missed it the first time.
In my experience, hype alone don't bounce like this. Can anyone give me a precedent for
such a double bonanza for short sellers at the expense of gullible investors like me who
think that AOL has gone through a pretty good trial by fire and showed itself to be a lot
tougher a competitor than it is getting credit for.
What I see here is a stock that has been in an uptrend for nine months, has taken out its
old highs, with good relative performance, with an improving earnings outlook and is a
leader in a torrid growth industry. Other than that, though, I hate it. |
