By: aristocat13
Reply To: None
Saturday, 18 Dec 1999 at 12:55
PM EST
Post # of 88347
Weekly Scorecard: AOL -7%, Nasdaq +3.7%. Here's Why
By Cintra Scott
AMERICA ONLINE
AOL 85.00
-1.13 -1.31%
DJIA
11257.43 12.54
Nasdaq
3753.06 38.00
Rus. 2000
466.21 0.95
12/17/1999 4:29PM ET
THE MARKET CAN'T DECIDE what to do with America Online
(AOL). It hit a new all-time high Monday, fell Tuesday, climbed
back a bit Wednesday, fell again Thursday, and was caught in
no man's land on Friday. All told, the stock has lost about 7%
since last Friday.
So why is most widely held Internet pure-play just treading
water after an action-packed week on the Nasdaq?
It's not for a shortage of news. This week, AOL announced two
big marketing partnerships with bricks-and-mortar retailers ?
Circuit City (CC) and Wal-Mart (WMT). Both promise wide
exposure for the AOL brand and effectively counter similar
deals struck by Yahoo! (YHOO) with Kmart (KM) and Microsoft
(MSFT) with Tandy (TAN) and Best Buy (BBY).
AOL also announced Friday that it had hit the 20 million
subscriber mark. That means it now has 10 times as many
subscribers as the next biggest ISP, despite the fact AOL's
Internet access (at $21.95) costs about 10% more than most of
its rivals' (at $19.95). Merrill Lynch Internet bull Henry Blodget
pointed out on Friday that the company said it had passed the
19 million mark on Oct. 25. "AOL has therefore added 1 million
members in 53 days, or 18,868 per day," Blodget said. Hard to
figure what investors saw to complain about in that.
The problem, it seems, is that pesky future. Investors are
worried that free ISPs, like the planned one announced by
Yahoo! (YHOO) and Kmart on Wednesday, will erode AOL's
ability to raise the $21.95 per subscriber it has grown
accustomed to. In a lackluster note Friday, Blodget defended
AOL's subscription pricing in the face of the free ISP
movement. But his logic was unconvincing (big brand
name, market segmentation, etc.) and he seemed to know
it.
"This note deals with a single question ? why we believe
people pay more for AOL now and why we think they will
continue to in the future," Blodget said. "It does not deal with
the most important long-term question for AOL investors, which,
in our opinion, is whether AOL can offset an inevitable
slowdown in the acquisition of new U.S. premium subscribers
(the market is now 50% penetrated, in our opinion) with
increased international and advertising and commerce revenue."
While international expansion has been hailed by many an
analyst as the next frontier for Internet hyper-growth, AOL's
foreign affairs are also fogged by the specter of free ISPs.
Free is the most popular way to get online in the U.K., for
instance. But what about the other two revenue generators:
advertising and commerce? AOL is growing in these areas, but
competition is fierce and getting fiercer. The biggest rival is
Yahoo, which gained advertising market share in the third
quarter, according to Blodget. During the quarter, Yahoo had
$140 million in advertising and commerce revenue versus AOL's
$120 million. AOL had $999 million in total revenue for the
quarter, versus Yahoo's $155 million. But that's because 72%
of AOL's revenue comes from subscriptions. And that's why it's
more vulnerable to both the ISP model and the Law of Big
Numbers ? it can't grow at this rate forever.
As mentioned, Yahoo! and K-Mart announced on Wednesday
that they would bring the Web to penny-pinching Americans via
a free co-branded ISP to be launched next year. That's sure to
attract more traffic to Yahoo, already the No. 2 Web property
(behind AOL's network and World Wide Web presence,
combined). Meanwhile, AOL went for the masses, too, with its
Wal-Mart alliance, announced just a day later. While AOL has
not yet offered free access in the U.S. to date, it may now have
to in order to keep up with Yahoo, Blodget surmised in a note
(this one dated Wednesday).
Is AOL in danger of losing its grip on America's credit card
numbers? After all, the company has spent like crazy to put in
the infrastructure to get people online. "We continue to believe
the market will continue to segment," Blodget said somewhat
pessimistically. However, the analyst also notes that AOL's own
bargain brands, CompuServe and Netscape (which now offers
free access in the U.K.), can latch on to some of the
budget-conscious consumers out there, offline, without diluting
the AOL brand name.
It is telling that Blodget's chosen "focus stock" for 2000 is
Yahoo. (He's obviously had a change of heart since he first
came to Merrill and rated YHOO shares a near-term Neutral.)
Nowadays Blodget sees stronger earnings growth in Yahoo ?
75% annually vs. his 50% long-term EPS growth estimate for
AOL. The concern is a big one: How will AOL's growth ? the
very thing investors have come to love ? sustain itself?
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