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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: steve lipson who wrote (5377)	10/31/1997 12:51:00 AM
From: Brent D. Beal	Respond to of 13594

Here is a simple test. -- Company A(OL) is worth around $8 b to $9 b. -- Company B is worth $120 b give or take $10 billion because it's been a while since I checked. Which company is worth more? * Brent says, "Company A because it has a higher P/E Then Brent says, "They're worth the same because each one's stock sells for around $70 per share." Then Brent says, "Company A is a pimple and the world has gone mad if it thinks it's worth even half of what Company B is worth." How could I have misunderstood your point when you didn't succeed in making any? * I'll try again. I know this is pretty basic, but let's have a run anyway. . . When a shareholder buys a stock, it represents an assets that will, at least in theory, produce income in the form of dividends or price appreciation. You would hope, all else equal, that two stock selling for $70 would eventually, at least in the long run, be expected to return (on a per share basis, mind you, I think this is still tripping you up) a comparable income stream, assuming that expected price appreciation and other revenue are included in the calculation. This isn't rocket science. If Intel and AOL are both selling for around $70, then this comparison is valid. Now, obviously, if we were to compare the two companies on a net income basis, then AOL isn't even a "pimple on Intel's butt"--at least the last time I checked, a few billion was worth more than red ink. Now, back to the per share thing, I doubt that if the two stocks were purchased today, that AOL would return even 1/2, in the long run, the per share revenue that Intel will, and hence my assertion that AOL is overvalued in comparison to what I believe is a fairly valued Intel. Now for the idiot and moron thing. Here's how I define them. Anyone who thinks this stock, on a fundamental basis, is worth a P/E of 100+ is, in my opinion, a complete moron that will not have much money to invest unless he or she improves substantially their faculties of reason. As for the "bigger idiot" theory--I, for one, am not ashamed to play the momentum thing and have, on numerous occasions turned a stock for a profit that I thought was fundamentally worthless or overpriced. The trick is not to be the last "idiot" left holding the bag when everyone else leaves the party. It's all in fun a games.