>What concerns me is the subscriber growth itself. There has been a lot of talk on the thread about AOL granting discounts to existing members. Some have even suggested that AOL gives free months to existing members to prevent them from canceling their service. If we are to believe this anecdotal evidence, (and there is no reason not to), this strategy seems quite troubling for us shorts. Since membership numbers are unaudited, what's to stop AOL from continually expanding these figures?
Wall Street (and the current crop of money managers) seems unconcerned about earnings (or lack there of). What's to stop AOL from continually reporting an increase in the number of subscribers?
After all, this is the number that gets the most attention. Earnings are apparently unimportant to AOL shareholders. AOL's expansion of reported members will continue to seem plausible to the MM, since they are also aware that PC prices are falling rapidly.
To me, this is the biggest flaw in the argument for being short AOL.
What do you think? Any and all thoughts appreciated.<'
Your concerns are valid short term, and of course the short term matters. Particularly between 10Ks (i.e., in the 10Qs) the company can play games with revenue recignition, for example, a customer pre-paying for one year of service should only have a the portion of his payment used up in the quarter recognized as revenue. Notice however that this backfires in future quarters. If the revenue growth is not there, anticipated revenue recognition will also backfire. A similar argument can be used for advertising and electronic commerce revenue. In the long run AOL will not be capable of hiding his business model does not work if indeed it does not.
IMO AOL is a long way from proving that their advertising revenue model will work. The moment I see reasonable evidence that they can (i.e., that I was wrong I will cover, even at a loss). I think the best indication that the model does not work is that insiders continue to sell (check Kip's post at roger's 98)
When I shorted I did so based on the following three observations:
1. the ISP business is not a profitable business and it will get worse.
2. IMO the advetising revenue model will not work because the net, unlike tv is an active not a passive media, and despite all the stats on hits. The thruth is that customers don't look much at the ads. You are at the drivers seat, not AOL. Of course there are some types of products like financial products that are more suitable for this type of ad but this is not were the big bucks are.
3. The stock is way too expensive and as someone else mentioned here it is so even if they hit on target every single goal they have through year 2005. You need to generate quite a bit of free cash flow to justify a market cap of over 12 billion.
Pancho |
