Brent, you've made some assumptions that predetermine your conclusion, rather than fully analyze the situation.
I'm not sure what tech companies you have been watching, but my impression is that the sector is often characterized by high gross margins -- this despite an obvious heavy need for R&D and other investments to keep on the cutting edge. In its heyday, Apple used to enjoy obscene 40 percent to 50 percent gross margins. (Stupid in retrospect, as they sacrificed too much market share, which was a big mistake CSRV also made and one of the few mistakes in the book AOL has not made.) Intel routinely enjoys high net margins. I would think that AOL is in a slightly better position than most to achieve high margins as they have no raw material costs that would rise in lockstep with usage, also their capital investment needs tend to be incremental rather than up-front, lump sum gulps for such things as multibillion-dollar, next-generation wafer fabs.
As for proving any points for you, naturally I think I proved my own points, not yours. <g>
You say AOL's stock price is too high to compensate for the risk. But if the upside profit potential is several orders of magnitude higher than you think, then a rough balance is actually in place. And, as I just pointed out, you dismissed by assumption the economies of scale/profit margin potential that we have seen time and time again in the tech sector and with other emerging growth companies. AOL may bungle its opportunity, that is certainly one of the risk factors, but I think this provides a perfectly plausible explanation of investor behavior in valuing the stock, rather than being forced to rely on your explanation, which is that there is no explanation.
Still another way to show that you are probably underestimating the potential payoffs is to reflect on why Microsoft paid $1 billion for a stake in Comcast and another half billion for WebTV. They have also made enormous investments in MSN content, and the speculation has been that they will be willing to lose hundreds of millions waiting for all of this to pan out and turn a profit. If the knowledgeable folks at Microsoft believe the annual profit potential in this sector can only be measured in the tens of millions or a few hundred million they would not behave in this manner.
As for other types of services that will overtake AOL, those are the real story stocks right now. Call me when one of them is turning a profit serving millions of customers with no glitches.
For all the criticism AOL endures, let's look critically at their competition for a moment. CompuServe and Prodigy have been dead in the water for years. I can't believe some of the posts I'm seeing here that refer to them favorably. A company that can't grow in a growth sector is frighteningly inept, not a value play.
AT&T has had more than a year to trade off its brand recognition and nationwide customer reach and couldn't even get 1 million customers for WorldNet. That's shockingly bad performance. And what will happen now that they've lost the little momentum they had from the product launch and from customers who viewed them most favorably all signing up. Other ISPs -- I don't want to ignore the possibility that some ISP could prove to be a better marketer than AT&T (not hard), but if Earthlink and Netcom are the biggest threats AOL faces, then I'm laughing all the way to the bank.
I like @home and C-Net as ideas. But the trip from good idea to mass market acceptance and profits is a long one. I'll be looking for opportunities to buy those stocks (as I did buying AOL a year ago) once they've done more of the heavy lifting that AOL has already accomplished and at some point when the market is fairly disenchanted with their prospects.
That leaves Microsoft. People once trembled at the thought of competing with IBM, the Japanese, etc. Microsoft is not destined to win every battle. But even if they do, I can happily accept AOL being forced to play Pepsi to Microsoft's Coke as the leading cyberspace brands. |
