I was going to post just part of this, but all it should be read. The last part concerns QCOM directly.
Current 12-Month Price Target: $212
Ind. Div.: - Yield: -Shares: 1.207 bln. 52-Wk.Range: 175 1/4 - 17 1/4
EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 6/98 $ 0.14
Actual 6/99 $ 0.35 234X $ 0.05 $ 0.08 $ 0.09E $ 0.13E
Current 6/00 $ 0.61E 134X $ 0.13E $ 0.14E $ 0.16E $ 0.18E
EPS CY Year P/E 1Q 2Q 3Q 4Q
Actual 12/98 $ 0.23
Current 12/99 $ 0.49E 167X $ 0.09A $ 0.13A $ 0.13E $ 0.14E
Current 12/00 $ 0.79E 108X $ 0.16E $ 0.18E $ 0.22E $ 0.23E
Summary:
The ongoing Microsoft-AOL battle, being played out in the press more so than in the
markets, has further fueled the downturn in AOL shares. We believe that AOL shares,
at current levels, represent a table-pounding buying opportunity. While some may
consider this reiteration of our STRONG BUY an exercise in catching falling knives,
there are a number of key points that investors seem to have lost sight of in the
short term:
We believe that the optics' of the current ruckus between AOL and MSFT
are tuned to free access and the open- vs. closed- arguments over the AOL
Instant Messenger and ICQ systems.
In fact, we believe that this is a battle for the platform. Specifically,
this platform of future Internet and content / communication tools is
represented by such devices as the television set-top box, personal
communication devices, and automobile-based information systems. These
devices and platforms reach billions of people each day vs. the current PC /
Internet environment tools which touch hundreds of millions of people, at
best, today.
We have NO REASON TO EXPECT that any action by Microsoft will have any
material impact to AOL's expected revenues, cash flows, or earnings the
basis of our valuation and stock recommendation over the coming two-three
years at a minimum.
The bickering and dueling between these two companies will remain a
front-line item in the press and over the Net. However, the Internet market is not
a two-party' system. We expect no singular winners at these levels.
AOL shares, from our perspective, can best (if not only) be valued using a
discounted cash flow (DCF) analysis. While other valuation methodologies
may be applicable - and noting that we employ additional vehicles as a
system of checks-and-balances to our primary DCF approach the DCF is not
subject to relative market performance.
AOL is a multi-brand, multi-revenue source company driven by subscribers
and users looking for brand, convenience, support and ease-of-use and by
merchants seeking to reach this lucrative audience, capturing sales and
reducing cost of acquisition for themselves hence the AOL role as
"aggregator" and "distributor" of content, commerce, people and services is
a powerful, well fortified position.
We believe that the market segment Microsoft will reach (first) will be
price sensitive, high-churn subscribers people shopping for price, not
brand loyal, and not value oriented. Hence, we expect MSFT will experience
difficulty bringing (and retaining) many of the high-margin, value-add
partners of the caliber that AOL has attracted and retained.
MSFT's move to focus on Free Access' addresses the low-end, narrow-band
marketplace. If anything, we expect that MSFT's promotional efforts could
drive significant pressure on on-ramp' companies such as Earthlink Networks
(ELNK $40 3/8, not rated), Mindspring Enterprises (MSPG -$26 3/4 - not
rated), the EROLS segment of RCN network (RCNC - $34 3/16, rated Strong Buy
by Guy Woodlief), Prodigy Networks (PRGY - $18 1/4 not rated) AT&T WorldNet
(T - $49 15/16, rated Strong Buy by Guy Woodlief), and the minions of
smaller Internet service providers who are already facing pricing and access
pressure;
The Internet chat' business detailed later in this note and
exemplified by AOL's Instant Messenger (AIM), ICQ (pronounced I-Seek-You),
and Microsoft's newly released MSN Messenger reflects an emerging, yet
still nascent portion of the Internet economy. Like the browser wars of the
1995-1997 era, we expect chat and IM class tools will rationalize to
standard offerings with interchangeable features and inter-operable access.
From a revenue and earnings perspective it is worthwhile pointing out that these
products are free to end-users (like the browsers were, and remain) and will drive
revenue from advertising and banner sponsorship. In terms of context, AOL's Instant
Messenger enjoys over 25 million registered users and ICQ alone has some 38 million
registered users. As of this writing, the c<BRnet download site (one of many hosting
this tool) has had over 62 million downloads since the May 3 release (see
http://www/download.com/pc/software)
As of this writing, MSFT has less than one million downloads and we expect that,
like AOL's early releases of AIM and ICQ, the churn rates will be high as users
download the products in order to sample and survey the new offering.
The Real Issue Is Platform Control As we noted above, the first issue, beyond the
chatter in the press, is control over the platform. The "platform" has been
Microsoft's mainstay, and quite successfully, for the past fifteen plus years. With
the advent of the browser and pending introduction of powerful set-top devices that
turn each television into a communications portal, the battle for control is moving
forward fast. Each company has signaled their intent to make a run' for the next
generation of the market, investing in wireless access technologies and companies
reaching into venues such as broadband (high-speed) access, content development,
aggregation and distribution. We believe that Microsoft's efforts near-term are to
put a spin' on AOL changing the perception of AOL from "challenger" to
"controller."
We believe that neither AOL nor Microsoft control the future of the Internet. Both
companies will have a strong say as to what the Net could look like and how the
mass market interfaces with the network. Device control, however, will be
paramount. We believe that the first-mover advantage is the critical point of
contention. AOL's alliance and $400 million investment in Hughes Electronics'
DirecTV suggests that figuring out wireless access and two-way content will be
critical in the race to control the user's preferences. At the end of the day, we
expect that user preferences will heavily influence AOL, Microsoft and Excite@@Home
(ATHM - $41, rated Strong Buy) alike but for the near term, it appears that the
battle royale lies between AOL and MSFT.
We believe investors should be attuned to advances in set-top box technology and
roll-out programs and progress. Platforms for the next several generations of
set-top hardware from Scientific-Atlanta (SFA - $ 34 7/8 - rated Strong Buy by
Senior Analyst John Butler) and General Instrument (GIC -- $42 15/16 - rated
Accumulate by Senior Analyst John Butler) will be the hot-beds of contention as
three vendors, if not more, vie to control the user experience via their software,
services, and brands. We expect significant additional news' (and noise) during
the 4th quarter of this year and into the first three quarters of CY 2000 as the
set-top boxes start rolling from production lines and into living rooms.
As well, we note that the promotion of digital television services (where signals
are transmitted to the set top box in digital format rather than older analog
systems offering better pictures, sound and greater channel capacity / content
choice) will capture the limelight quickly as the cable operators seek to increase
cash-flows and prepare their service areas for high-speed over cable services.
So, the point remains that the next platform of meaning the set top box will
bring with it continued controversy in these names.
What about the AOL Anywhere plan and Competition from Excite@@Home? Again, we
wish to point out that these companies are involved in a battle of brand and content
which ultimately turns into a battle for consumers, commerce and advertising
revenues. The anywhere' platform arguments, which have recently focused on
cellular and PCS-based telephones and personal digital assistants such as the Palm
Pilot are, we believe, entry points a big test-bed of you will. From the
perspective of critical mass, the platform of choice today is, and we expect will
remain, the personal computer. As noted above, we expect the platform to extend to
the set-top box and perhaps communication devices such as telephones but we expect
the phones to act primarily as supporting tools for example as a vehicle through
which to check one's mail, news, stock prices, etc. While many of the anywhere'
devices (most of which are wireless) enjoy a cute' factor functionally they are
ill equipped to act as a primary vehicle for messaging and daily activity.
This guy has no vision what so ever.
Greg
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