Zax,
If you think AOL's capitalization is in line with its fundamentals, then I'd suggest you start sharing whatever drugs you are doing with me.
What is a reasonable valuation for AOL? Certainly growth, both of the Internet and AOL, has to be considered. I've seen various estimates of Internet growth going forward but 30% per year is the number I currently see most frequently, a number that more or less matches AOL's growth. This quarter, AOL says it added 951,000 new subscribers to a 12.5 million subscriber base, an annualized rate of about 30% (Yes, they probably lost some too, raising the issues of net new subscribers, but that's a quibble).
In spite of AOL's glowing percentage growth numbers, e-commerce and advertising are about 16% of revenues, the same level they have maintained for a while. In other words, AOL is growing linearly, not leveraging their subscriber base, probably the main reason they had to raise subscription rates a while back.
So I'll assume for this post that AOL grows at the same rate as the Internet and that the growth is proportional--the net grows 30% a year, AOL grows 30% a year.
Since companies are valued in the marketplace by investors' present perception of the company's future value, I would suggest that it is not unreasonable for investors to assume AOL will continue to grow at that 30% rate for the next 5 years. Though I would prefer to use a discounted cashflow valuation of AOL, a more reliable measure, there are too many murky tax and software capitalization issues so I'll stick with earnings.
At $.26 this quarter, AOL's current earnings runrate is $1.04. Assuming linear growth of 30% per year in AOL's subscriber base, the 5 year compounded earnings number comes out to about $3.85 cents per share. Five years from now, assume AOL's P/E matches its growth rate, something that tends to happen with mature and stable companies. $3.85 times 30 equals--surprise, surprise--equals about $115/ share.
It is therefore possible to say that investors' present perception of AOL's future value is not at all unreasonable. Whether AOL will realize that future value is of course uncertain.
Best,
--Steve |
