Dorine, I sleep better with my investments in MSFT. I can go away and not worry about anything. So, I'm waiting patiently to buy more in the low 80s and high 70s, the ranges that Brian Malloy specified.
As for AOL, it should have known better when it offered the code of its instant messaging (IM) to programmers to create complementary programs. Instead, it found a rival IM services in MSFT.<ggg>
Here's something for your Sunday reading pleasure.
America Online Is No Longer Invincible
By KENNETH N. GILPIN
For long-term holders, the recent slide in America Online's stock price is nettlesome, but little more. After all, since 1992, when the company went public, until April 6, when it reached a closing high of $167.50, the stock had surged nearly 8,000 percent.
People who bought the shares over the last few months, however, might be more perturbed. The stock is off about 50 percent from its peak and has helped to drag down the high-flying Internet sector.
Since early April, TheStreet.com's Internet index, which includes America Online, Yahoo and Amazon.com, is down more than 30 percent.
Henry Blodget, a senior analyst at Merrill Lynch & Co., took time last week to talk about America Online's current problems, its prospects and the selloff among Internet stocks. Here are excerpts from the conversation:
Q. Beyond profit-taking, are there fundamental reasons people have been selling America Online stock?
A. The summer is a slow time for Internet stocks. Also, since these stocks trade at such high price-to-earnings multiples, they are very vulnerable to higher interest rates.
In addition to those broad-based problems, AOL is faced with the introduction of free Internet access in Europe as well as bundled access, where companies are bundling personal computers and access to the Internet for a single price. Finally, there is the broadband issue and the threat posed by cable companies.
Q. And Microsoft might offer either free access to the Internet or access at a much-reduced rate. How serious a threat is that?
A. It is potentially serious. America Online derives about 75 percent of its revenue from Internet access, and Microsoft can afford to provide access much more cheaply because it is not their core business. They will be prepared to do that because they want to insure they have a role in the post-personal computer world. As the most powerful technology company in the world, Microsoft presumably could lose a significant amount of money to gain market share.
Q. Could competition from Microsoft jeopardize America Online's existence?
A. No, I am not concerned that AOL will be put out of business. But the danger is that the new users they get as a result of this battle with Microsoft will be less profitable for them than the subscribers they have now.
Q. When will these threats be addressed?
A. Over the next 6 to 12 months we will get a lot of clarity on how America Online will work these things out. It is very possible they will work out a deal with the cable companies. And it is very possible they will trump Microsoft, as they did once before.
That said, we have been increasingly cautious in the way we look at America Online. Competitive issues have become more of a concern. We still have the stock rated as a "buy," but we are not as optimistic as we were six months ago.
Q. Given the Internet selloff, is now a good time to buy some of these stocks?
A. The first decision to make in investing in the Internet is whether to invest directly or indirectly.
For most investors, the best strategy is do to it indirectly through companies like Cisco Systems, Microsoft and AT&T, companies that are taking advantage of the Net, but are not involved directly.
For those who are aggressive and have a tolerance for the volatility of direct investing in the Internet, we recommend they hold a portfolio of the best companies and limit the exposure in those to somewhere between 5 percent and 10 percent of their overall portfolio.
Q. What sort of companies do you favor?
A. We think it makes sense to own companies in three areas: business-to-consumer, infrastructure and business-to-business. The Internet is going to be very big, but it is impossible to know which companies are going to win. A well-balanced portfolio will reduce dependence on the success of one.
America Online, Yahoo and Amazon.com are some leaders in the business-to-consumer category. Inktomi is a leader in infrastructure. And Ariba is a leading company in business-to-business.
Q. The recent selloff has already started talk about consolidation. Are some of these companies going to get picked off?
A. There are too many competitors in the market right now, and there will be a shakeout. In most market segments, there are at least five or six players. We think the top two in each will survive, but that the others are suspect.
Q. America Online has seen its market capitalization fall by about half in the last four months. Could it be a takeover target?
A. Despite the decline, AOL's market cap is quite a bit bigger than it was eight months ago. It has been a spectacular stock, even with the pullback. It is still in a tremendously powerful position, and there is no need for them to merge with someone else. |
