The Q4 report is misleading. Subscriber growth has slowed down
greatly in comparison to previous quarters. I compiled this table
using data from past earnings reports:
FY Marketing Sub. Growth Acq. Cost
------- --------- ----------- -----------
97 Q1 $150M 414,000 $362
97 Q2 $151M 1,200,000 $125
97 Q3 $93M 236,000 $393
97 Q4 $100M 600,000 $166
98 Q1 $98M 821,000 $119
98 Q2 $97M 1,267,000 $76
98 Q3 $84M 1,148,000 $73
98 Q4 $95M 665,000 $143
'Acq. Cost' is the acquisition cost per new subscriber. It should be
on a down trend as AOL builds brand-name recognition. FY97 Q3 is an
abberation due to the flat-rate-pricing fiasco, which also spilled
over to FY97 Q4.
This past quarter, however, acquisition cost doubled from the previous
quarter for no apparent reason. AOL's marketing strategy is to flood
the public: AOL commercials on television, AOL 50-Hours FREE CD's in
the mail, and in bookstores like Barnes & Nobel. Most computer owners
receive multiple AOL CD's.
If the subscription growth is slowing despite these marketing efforts,
then it may signal the beginning of growth saturation in the ISP
business. If so, AOL stock price will be negatively affected.
I recently discussed subscriber valuation on the Motley Fools board.
The estimate was between $1,300 and $2,000 per subscriber. The upper
limit is borrowed from the cable television industry. The low-end
reflects the 25% discount that some analysts use to evaluate ISP's.
The recent high of $140 per share matches the high-end evaluation of
those who hope AOL would reach 15 million subscribers soon. $2,000 *
15M sub / 222M shares = $135. But using the known subscriber number
for FY98 Q4, the high-end drops down to $112 per share. The low-end,
though, is $1,300 * 12.5M sub / 222M = $73 pre share.
So, the stock closed today at $111. Where will it go next?
Yikes |
