Why we own AOL: The number one online service in the world has 17 million members (over 19 million members total) at its fingertips. Whether or not America Online will need to lower its access fees or pay high-speed Internet providers part of its subscription fees, the company will always have the strength of its nearly 20 million members. It can leverage them through advertising, commerce, saleable applications, and special content charges, among other means. The strength is in the audience. During the gold rush of the online world, the key is to build a large community. Many long-term revenue possibilities follow.
AOL is already profitable, of course. It is expected to earn $0.57 per share next year and grow 52% annually the next five years. We'll knock that number down some (assuming closer to 43% growth) in order to arrive at a fiscal 2005 estimate of $3.43 per share, putting the stock at 33 times the forward estimate. As with eBay, it's another large guess. It could easily go either way. Given the growth of the Internet and AOL's strengths, a betting Fool (if there is such a thing) would bet to the upside.
Again, the point is that current valuations of New Economy leaders are not outlandish when one looks ahead five years and estimates potential -- that is, when the potential includes eventual success, which is a variable.
Ed Forrest
From The Motley Fool |
