Johnathan, If you think AOL will survive, then you've actually explained why it deserves a multiple far in excess of the average ISP.
Once a greater percentage of households is online, being a leading ISP should prove to be a pretty profitable business, either through advertising, direct uses of financial services and other sales services, or just through massive economies of scale that allow firms to prosper from a huge base of subscriber revenues.
The problem for the typical ISP is that it built itself as a commodity service and has no equity in anything to differentiate itself from the regional Bells, long-distance and cable cos. or anyone else with deep pockets who is likely to try to crowd into the market. If I thought one of today's ISPs was doing such a great job that it was sure to emerge in the next few years with a meaningful market share and some national brand awareness, I probably would be willing to pay 100 times current earnings for that business. If, on the other hand, I only think there's a 10% chance of that happening, then I can't pay more than 10X to account for the 90% probability that the business isn't going to survive.
I think AOL can survive because it now offers a reasonable value proposition to a wide segment of the market: It's a painless way for newbies to get online, an adequate all-around service for casual users, and I'm keeping it as a general backup, for personal e-mail and a few other things, even though I use an ISP most of the time.
This is an age-old marketing story: give away the razors, sell the blades. In tech, the modern variation on this theme has been to build an installed base, then earn profits as one of the survivors in a maturing, but still rapidly growing area.
AOL still has to do an awful lot of things right to get to that point. There are no end of things to worry about with this stock. I agree with almost every negative point I've seen raised here. I'm showing a lot of faith in management, without enough of a track record of long-term success to tell me whether they are up to the challenge.
What moved me to buy the stock a couple of months ago at $40 was the contrarian gulf that was opening between my perception of additional value in AOL due to its improved usefulness and survival prospects, at the same time that it was becoming distinctly out of favor with investors. So about the only thing you know for sure after reading all of this is that I am one heck of a lousy market timer. |
