Robert:
I also believe the valuations on AOL are way off the mark. Dividing the market cap by 5 seems like a good starting point. But the market clearly loves AOL, and as a good friend of mine just reminded me, it's usually foolish to think you're better than the market.
Let me give you one interpretation as to why people believe AOL is worth the numbers. I don't agree with this point of view, but as will all markets, there is always a bullish case.
Essentially, the market anticipates the merging of television and the internet, at least in terms of advertising potential. AOL claims that if they got paid for every one of their current web hits, 550 million per day, they would generate over $ 3 billion dollars based on current web advertising rates. And this is based on current members. With more members comes more impressions, and more money. This is the logic on Wall Street.
The logic also goes that major advertising spenders will fall in love with the targeted potential of on-line consumers. Eventually, all the billions of dollars currently spent on television and print will migrate to the internet. Again, they view AOL as the leader of this space, with over 12 million members. Never mind that the Web has over 50 million users. In Wall Street's mind, AOL's biggest competitor is MSN, with just over 2 million members. In Wall Street's mind, AOL has already slaughtered the dragons standing in its way, namely IBM and sears. When the advertising dollars eventually migrate, Wall Street figures they will flock to AOL's captive audience.
In addition, the market is awarding AOL a fractional piece of all future internet commerce. I just bought an airline ticket through travelocity. It was fast, efficient, cheap, and delivered to my door. Certainly a plus to on-line shopping. Apparently, the market believes that all kinds of things will be bought this way in the future. Groceries, Insurance, Vacations, Stocks. Will the future delivery mechanism need an interface from today's internet? Beats me. But the market thinks it will, and it sees AOL as the leader to fill that space.
What about the shift to TV? The market believes that even if the delivery mechanism changes, ie from PC to TV, there will still be a consolidator. This is the nature of why people love the internet. Content and community. Wall Street figures that AOL will become an even more powerful network, once 100 million TV households are all simultaneously connected.
Of course, I believe this speculation is unwarranted. I don't forsee AOL capturing the space the way Wall Street imagines. But, does that make me foolish? In a way, yes. I am violating my own rule of thinking I'm smarter than the market.
As long as Wall Street continues to love a futuristic vision, it will value AOL at astronomic levels. Never mind the ongoing losses. Never mind the bad service. Stocks are about future earnings.
As long as the "futuristic earnings" continue to rise exponentially, with more PCs, connections, on-line advertising, commerce, etc. Wall Street will award AOL the prize. Until Wall Street sees another model that looks better from a profit standpoint (and there aren't really any out there despite the competition) it will award AOL the prize. Seems wrong, I know. But such is the power of speculation.
Regards,
Jason Cogan |
