somewhat OT, but worth knowing for many reasons, IMO - BTAB on AOL:
AOL: AOL TV Broadens Platform Reach--Reinforces "AOL Anywhere" Strategy--Reiterate "Strong
Buy" Investment Rating
Bankers Trust Research/BT Alex. Brown Research
Shaun Andrikopoulos,Lance A. Berger
May 11, 1999
HIGHLIGHTS:
--AOL today announced plans to develop AOL TV, a product that will couple
key functions of the current AOL product and newly developed services to
form an interactive TV platform.
--The Company has formed alliances with key vertical players across the TV
industry to roll-out its new product (DIRECTV, Hughes Network Systems,
Philips Electronics and Network Computer).
--AOL TV reinforces the "AOL Anywhere" thesis and our belief that AOL is
going to be ubiquitous in the home.
--We believe the alliance also reinforces our call last week (5/7/99) which
said that there is a bigger picture than just accessing the cable market.
--We continue to believe that investors should not own another Internet
stock until they first own AOL.
--We reiterate our 12-month price target of $200 and our "strong buy"
investment rating on the shares of AOL.
DETAILS:
WE WANT OUR AOL TV-NEW ALLIANCES BRING PLATFORM RICHNESS
AOL today announced plans to develop AOL TV, a product that will couple key
functions of the current AOL product and newly developed services to form
an interactive TV platform. AOL TV, which will be offered across the
DIRECTV satellite network and operated through set-top boxes, will be
connected to AOL via 56k modems, and will also be xDSL enabled.
We feel that this move puts yet another stake in the ground suggesting that
AOL will be everywhere, with or without the help of cable MSOs and
Microsoft. The Company has formed alliances with key vertical players
across the TV industry to roll-out its new product:
--DIRECTV will offer AOL TV across its base of 7+ mm subscribers. We feel
that this could considerably add to AOL's footprint as the satellite
platform continues to extend its services and reach. If we assume that AOL
can capture 5% (of a growing base), the Company could add an incremental
350,000 members to its current 17+ mm subs in the next 3-5 year timeframe.
We note that this compares to @Home's current subscriber count of 460,000
and 1.1 mm year-end estimate.
--Hughes Network Systems, a major manufacturer of DIRECTV's satellite
system, will create an AOLTV/DIRECTV satellite set-top receiver. We
believe that AOL will be able to leverage the network of Hughes Digital TV
as well as its broadcast capabilities. We reiterate our thesis that the
AOL consumer brand is a powerful lever and should continue to bring
technology and media partners to the negotiating table across all
platforms.
--AOL has contracted with Philips Electronics to produce the AOL TV set-top
box that will operate in conjunction with DIRECTV's satellite network and
Hughes' set-top receiver. We believe AOL will leverage the platform
capabilities of Philips Electronics to offer a comprehensive solution that
will uphold AOL's motto of ease-of-use and consumer convenience.
--The new AOL TV platform will leverage the technology of Network
Computer's TV Navigator software. Importantly, AOL has chosen (at least
initially) to implement a non-Microsoft operating system solution.
AOL ANYWHERE-MOMENTUM BUILDING
AOL TV reinforces the "AOL Anywhere" thesis and our belief that AOL is
going to be ubiquitous in the home. We further feel this validates our
thesis that it is unlikely that AOL will be tied to any single
infrastructure or platform long-term. We contend that the alliance
illustrates that the real power of AOL is the consumer programming brand.
Net/net, the control of the eyeballs and the media is really going to rest
with AOL as the branded programmer...content remains king.
We believe the alliance also reinforces our call last week (5/7/99) which
said that there is a bigger picture than just accessing the cable market.
We feel that wireless, cable, satellite, digital TV, dial-up and xDSL will
serve as infrastructures for AOL as it becomes the ubiquitous interactive
media programming brand across all the platforms.
RATING AND VALUATION
We continue to feel that AOL is the core Internet holding, and that as the
dominant media brand in the space, it will play a pivotal role as broadband
rolls out. Net/net, we continue to believe that investors should not own
another Internet stock until they first own AOL.
If we apply our 23% long-term operating margin assumption to our CY 2000
revenue forecast, fully tax it, we arrive at a current 157x theoretical
2000 P:E TEMA (theoretical earnings multiple analysis). This represents a
3.1x multiple of our 50% 3-5 year EPS growth assumption. Our 12-month
price target of $200 on the shares of AOL equates to a 227x 2000 P:E TEMA,
a 4.5x multiple of our long-term growth assumption, and a 31x multiple of
our CY'00 revenue.
Importantly, other leading Internet franchises such as Yahoo!, eBay and
Amazon.com are currently trading at premiums to their 2000 theoretical P:E
multiples of 3.0x, 5.2x and 2.8x, respectively. We remind investors that
AOL, which is currently much further along the harvest and leverage
earnings curve than any other Internet company, trades at a P:E multiple of
184x to our CY 2000 EPS estimate. We believe that, as the dominant
Internet/on-line player, AOL represents a core holding for growth-oriented
investors long term. We reiterate our "strong buy" investment rating on
the shares of AOL. |
