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Technology Stocks : America On-Line (AOL)
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To: LLCoolG who wrote (4012)1/29/1999 4:13:00 PM
From: Chuzzlewit  Read Replies (3) of 41369
 
At some point market cap needs to be based on free cash flow. I have yet to see the free cash flow that would justify these kinds of valuations. Just look at it this way: if you consider a mature company with little or no growth prospects, it will generally have a free cash flow in the neighborhood of approximately 1/7 its capitalization given current market conditions. On a cash on cash basis that number represents about a 15% prospective cash flow yield, which includes an adequate risk premium. That means that to simply justify the current market cap, we would need to be able to envision a free cash flow number substantially greater than $11.4 BB in the foreseeable future. And that leaves no room for the added risk of a company in the early stages of growth. [Free cash flow is the cash flow from operations less the cash required for capital improvements to maintain operations] If I read the press correctly, free cash flow from the last six months totaled only $205 MM.

So the critical issue is: how do we get from the current semiannual cash flow of $205MM to the required semiannual cash flow of $5,700 to justify today's market cap. How long will it take, and are the growth rates sustainable given the financial engine of the company -- that is, will such a growth parth require huge outlays of cash in the form of A/R and capital expenditures so as to render the plan unattainable?.

TTFN,
CTC

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