AOL seen reaping rewards of deals
msnbc.com
Online giant expected to post
profit of 13 cents per share
Steve Case, CEO of America Online, gestures during a news conference in New York Oct. 5.
By Elliot Zaret
MSNBC
Oct. 19 — Nearly a year ago, America Online Inc. shelled out billions of dollars for Netscape and $400 million for ICQ. And as the online giant prepares to announce its latest quarterly earnings, analysts say the moves have paid off — with AOL transforming itself from “Internet Lite” to “the General Motors of this industry,” with strong positions in almost every segment where the analysts see profit in the Net.
“IN AN INDUSTRY transitioning from one product to fit all mass market needs, much like Ford's Model T in the early days of the auto industry (‘any color you want as long as it's black'), to many brands for different emerging segments of a rapidly mainstreaming online market, AOL is increasingly positioned as the early General Motors of this industry, with a strong portfolio of ten brands for different needs, market segments, and budgets,” Goldman Sachs Internet analyst Michael Parekh wrote in a recent report on the company.
According to First Call's survey, analysts expect AOL to report earnings of 13 cents per share for its fiscal first quarter ended Sept. 30, compared to 6 cents in the same quarter last year.
“I think they'll beat the consensus,” said Ulrich Weil, senior technical analyst at Friedman, Billings, Ramsey and Co. “My published number is 13 cents, but I think they'll do better than that.”
The heart of AOL is, of course, its subscription-based online service. And the company already announced that it expects record subscriber growth over the quarter — adding nearly a million members to the 18 million members it announced last quarter. At the same time, its budget service CompuServe added 300,000 members to its 2 million member base — largely because of a $400 rebate offer when a consumer buys a PC and three years of CompuServe.
But with the Netscape and ICQ deals, as well as ones that brought the company Moviefone, Spinner Internet radio, WinAmp MP3 music player, analysts see AOL as much more than that.
“Our enthusiasm for AOL over the next four or five years is driven not by what it is perceived as today, but what it poised to be — the largest interactive media services company driven by the dramatically changing usage habits of hundreds of millions of users worldwide, as online and offline activities increasingly shift, blur and converge across most industries worldwide,” Parekh wrote.
THE NEED FOR HIGH-SPEED
One thing that has worried analysts is whether AOL will be able to pursue its future as a media mega-player if it doesn't make a deal to provide its service over high-speed cable modems — a market currently dominated by AT&T, which is part owner of Excite@Home, and Time Warner, which controls Road Runner.
AOL is rumored to be in discussions to buy Excite@Home from AT&T to counter these concerns.
But Weil said those worries are unfounded.
“AOL will forge a deal with AT&T at the right time,” said Weil, who said that if AOL waits long enough, AT&T will need it more than it needs AT&T. “AT&T will ask, ‘where do we get the content to fill these fat pipes?' And AOL is one of the few who can give the content that will fill those fat pipes.”
Weil expects the two companies to come to terms mid-next year.
Further, AOL already has a presence on high-speed Digital Subscriber Lines (DSL) provided by the regional bells. According to Parekh, the DSL lines provided by Ameritech, BTE, SBC and Bell Atlantic will give AOL high-speed access to 65 percent of U.S. households.
AOL's other big push has been in e-commerce. It's Shop@AOL, and accompanying Shop@Netscape and Shop@CompuServe, have attracted about 25,000 new online shoppers a day, according a company press release.
“The merchandise and e-commerce revenue, that's very critical,” Weil said. “While the subscribers pay for the infrastructure, the merchandise and e-commerce revenue is virtually all profit.”
STOCK IN A SLUMP
Meanwhile, despite all the bullish analysts, AOL stock has been slumping since hitting a high of 175 ½ in April. The stock dipped as into the low 80s this summer — 50 percent off its high — before recovering to the low 100s.
Data provided
by Microsoft Investor
“That is not reflecting the fundamentals at all — it reflects macroeconomics and psychology,” said Weil, who said he has been “bewildered” by the stock market's moodiness.
Weil said that with concerns over inflation and interest rates, investors simply found it easier to sell AOL than other smaller Internet companies, so AOL took the brunt of the market downturn.
Parekh set a “conservative” 12-month price target of $160, saying that the company has plenty of room to grow.
“It is easy to be jaded about the AOL story given the dramatic success that the company has seen over the last two years,” Parekh wrote. “It has become the large-cap, blue-chip investment in the Internet space, with the obviously attractive business model of a fast growing subscriber base that is being monetized by a high margin advertising and commerce revenue stream, along with subscription revenues.”
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