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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: Steve Robinett who wrote (27423)	7/30/1999 11:50:00 AM
From: nohalo	Read Replies (1) \| Respond to of 41369

There has to be a reasonable way to construct a valuation model for a net stock. I think you are grossly under-estimating the growth potential in the leveraging side. AOL uncharacteristically has not taken aggressive steps to leverage its massive membership numbers at ICQ and the Instant Messenger sites. Perhaps they're too busy with the broadband issue. Perhaps we can ask Jeff to factor in the growth in these two areas from near zero to perhaps some 20 to 30% of AOL revs in 2002. Perhaps someone from AOL is reading Jeff's analysis (very good), and the ensuing discussion. Or perhaps we are barking up the wrong tree, and Steve Case has it all figured out. DA.

To: Steve Robinett who wrote (27423)	7/30/1999 1:35:00 PM
From: Jeff Dryer	Read Replies (1) \| Respond to of 41369

Steve, Great post! >Valuation models for net stocks are notoriously difficult to >construct rationally. I could construct convincing models that AOL >is worth $30/shr or $200/shr and all those models would tell us is >that high-growth companies in with emerging technologies are >difficult to values. I totally agree. The uncertainty makes constructing the models more valuable because it helps one understand the risks involved. Wall Street analysts don't have an easy time of it at all... it's hell. I spoke with an analyst that helped take Netscape IPO back in 1995. He helped price the Netscape IPO at around $500 million which he thought was way too high. And then to his amazement, Netscape quickly skyrocketed to become a multibillion dollar company. In 1996, when I asked him to explain how he and the other analysts involved with the Netscape IPO went about valuing Netscape... Why only $500 million initially? He said HE HAD NO IDEA. They were taking a WILD GUESS. >You assume a 75% compounded revenue growth rate. There is still >substantial issue whether AOL's revenues can grow in any other way >than by growth in its subscriber base. For AOL to grow revenues at 75% year, AOL will likely need to increase advertising and ecommerce revenue at more than 100% per year. AOL's revenue stream this last quarter was 1.4 billion of which about 300 million was advertising and ecommerce. (correct me if this is incorrect). I would think a 50% overall growth rate is more likely and it's what Wall Street is expecting/hoping for. You may have a better guess at growth rate than either me or Wall Street. >3) You assume a P/E of 125. Why? You assume a growth rate of 75% and >P/E usually has something to do with growth rate. You're right. P/Es and Growth rates should be about the same. It's been my observation that industry leaders tend to have P/Es higher than their growth rate (they are awarded a premium). This may not continue to be the case going forward. >You discount your 2002 target price back at a 20% rate, arbitrarily >assuming a 20% return target. Make it whatever you want, do your own calculations, and see if the results are interesting. If someone expects a 50% return on their money per year, they're going to need to buy in at a very low stock price. Often times an analyst issues a STRONG BUY recommendation, but if you read the report, it's only predicting investors will earn 10 percent a year. The problem with the industry is that people, for the most part, listen to the recommendations via the Media, but don't read the reports... so the context of the recommendation is not known. Therefore, it's my belief that investors should just do their own thinking. As savvy Internet users, you probably understand the Internet better than the Wall Street analysts do anyways.