TA, barriers to entry are certainly an important consideration, and several kinds of barriers exist. Barriers might be heavy capital outlays, proprietary technology or brand-name recognition. In AOL's case it is clearly the latter, and that is the most fragile and ephemeral of the three.
My suspicion is that we have a very strong disconnection between what analytical approaches tells professionals that a company is worth (as in the prices charged when an IPO is issued), and what the stock market pays for it.
I am having a very hard time justifying the current price of AOL in light of projected future cash flows. For example, imagine AOL as a mature dominant, company with 100MM US subscribers. I can imagine such a company generating $4.50 - $5.00 annually in revenues and growing at roughly 9% per annum. In other words, I am describing a typical S&P500 company. The current forward-looking P/E is around 25, which, if applied to AOL at that time would give it a future valuation of roughly $125.
But today it is trading at around $175. Where is the risk premium? What am I missing? Don';t get me wrong, the company is solid as a rock. But the stock price seems to be off in never-never land.
TTFN,
CTC |
