CTC,
Since this thread is supposed to be about developing methods of analyzing Internet stocks, let me raise something that's been a hobby horse of mine for a while, the linear growth of companies like AOL.
I just went through AOL's 10-Q. Advertising and e-commerce contributed 18.85% of revenues as compared to the year ago quarter when they contributed 18.41%, proportionately a flat contribution. (Though e-comm and ads contributed a higher percentage than last quarter, the difference is explained by AOL itself as seasonality.) Contrary to the suggestions of almost everyone that AOL will leverage their customer base and boost the contribution of advertising and e-commerce, in fact, there is no evidence for this idea, only evidence that AOL is still growing in a linear fashion. Add a customer, earn more--not earn more from existing customers.
Though cash flow will certainly grow as the dollar amount of the higher margin advertising and e-commerce grow, AOL is still growing proportional to its customer growth. Currently, that's about 100% per year (AOL added 1 million subscribers in January to its 15 million base which is 6% per month compounded and produces about 100% per year) At 100% growth rate and assuming a $.59 cash flow, AOL discounts to zero in about 8 years, when under these assumptions it will have about 3.8 billion customers.
What's wrong with this picture?
Best,
--Steve |
