I have attempted a simple model for aol valuation in light of Prof.
Siegal's wsj piece regarding aol. Any feedback would be appreciated.
Assumptions : Top line :
Subscriber base increase parabolic, using aol
growth, '96 - '98, & extrapolation to '05.
Subscr. rev/yr = Subscr. base * (21.95*12)
Ads, Commerce, Other: linear growth, using
'96-'98 data, & extrap. to '05.
Case A: Net Margins @10% a la Siegal.
Case B: Net Margins modeled :
Cost of Sales, parabolic extrapolation from
12 mo. 6/96-6/98
SG&A: parabolic extrapol. using 12 mo. 96-98
Marketing Costs: Fixed @400M
R&D Costs: Fixed 200M
MISC Expense : @ 20% of SG&A
It appears that Prof. Siegal's assumption of 10% net margins is not validated by the trend, but if this is the case, clearly aol is severly overvalued. But if profit margins are near case B, aol may have price support fundamentally. I believe that the top line estimates are conservative since only the subscriber base at the beginning of the year is used to determine subscriber revenue (i.e. the subscr. ramp from Y '99 to '00 of 7M subscribers is not included in the calcs.). If the case B costs are realistic, & top line growth is attained (parabolic user growth with inelastic pricing, linear ads, commerce, etc) maybe aol isn't overvalued using average 5 yr growth of 80 -> PE ??? Or is this just fluff... Comments appreciated..
TCI
[All units in M] Yr '98 Yr '99 Yr '00 Yr '01 Yr '02 Yr '03 Yr'04 Yr '05
Subscriber Base 8 13.86 21.09 29.95 40.41 52.49 66.19 81.50
Subscr. Rev. 2,161 3,650 5,556 7,888 10,644 13,827 17,434 21,467
Ads, Commerce 439 940 1,109 1,277 1,446 1,614 1,783 1,951
Totals 2,600 4,590 6,665 9,165 12,090 15,441 19,217 23,418
Rev. Growth 54.30% 76.55% 45.19% 37.51% 31.92% 27.71% 24.46% 21.86%
CASE A :
Net Costs (90% of Rev):
Net Income 92 459 666 916 1,209 1,544 1,922 2,342
Income Growth -118.44%398.93% 45.19% 37.51% 31.92% 27.71% 24.46% 21.86%
EPS $0.10 $0.49 $0.71 $0.98 $1.29 $1.65 $2.06 $2.51
Diluted Shares 934 934 934 934 934 934 934 934
Price($) (PE=40)$3.94 $19.66 $28.54 $39.25 $51.78 $66.13 $82.30 $100.29
CASE B:
Costs & Exp. :
Cost Sales(para) 1,678 2,466 3,438 4,594 5,934 7,458 9,166 11,058
Marketing (Fixed)400 800 800 800 800 800 800 800
R&D(Fixed) 100 200 200 200 200 200 200 200
SG&A(parabolic) 230 382 583 833 1,132 1,480 1,877 2,323
MISC(20% SG&A) 46 76 117 167 226 296 375 465
Total 2,454 3,924 5,138 6,594 8,292 10,234 12,418 14,846
Net Income 146 666 1,527 2,571 3,798 5,207 6,798 8,573
Income Growth 356.02% 129.37% 68.36% 47.71% 37.11% 30.57% 26.10%
EPS 0.16 0.71 1.64 2.75 4.07 5.57 7.28 9.18
Diluted Shares 934 934 934 934 934 934 934 934
Price($) (PE=40)6.25 28.51 65.40 110.11 162.64 222.99 291.15 367.14
Price($) (PE=80)12.51 57.03 130.80 220.22 325.28 445.97 582.31 734.28
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