>> Yikes, your analysis is fatally flawed.
What you looked at, apparently without realizing it, was an absurd scenario in which AOL would stay in business for one year and then close its doors, shoo away all customers and refuse to accept any more money for them under any conditions.
By your reasoning we should short all stocks. Even those that trade at clearly bargain multiples on earnings in the current market like 8X or 10X. After all, if they are only going to earn $1 a share, how on earth can anyone justify paying $10 for a stock like that? <<
I gave $200 out of $1,000 as profit for providing ISP service. This is because currently the average monthly payment is $14. If margin is 20% (anyone know the real #?), then 200/2.8 = 71 months, or 6 years of subscription. What will happen in 6 years? People will find faster way to connect to the internet: cable modem, personal satellite dish, or ISDN. What sets AOL as inferior to other ISP's, is that AOL can't serve as a connection host to cable modem or ISDN. PacBell and Netcom, for example, have already build the infrastructure to be such hosts because their sole business is ISP.
The days of AOL's niche as ISP+content is numbered. I don't see it adapting to new technologies without incurring inefficient operating costs. If AOL is going to offer cable modem tomorrow, how will they do it? How much will it cost to AOL? How many existing subscribers will switch over? Very few.
AOL is not adaptive to new technologies, and its business model is unclear and questionable at best. That's why it doesn't deserve sky high multiples.
Yikes |
