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

To: John Kratus who wrote (5737)	11/11/1997 3:34:00 PM
From: Todd Daniels	Respond to of 13594

Yeah, Ax.B's 'valuation' approach is unbelievable. As I posted with numbers a while back (and updated below), the comparisons to cable are alone invidious and ridculous. Ax.B's 'hybridizing' that with comparative price/sales ratios is even worse. - Yahoo et. al. do not engage in development of content nor extensively in payment for it. - That they trade at 10x sales reflects faster growth of their top line. AOL's latest quarter over quarter growth was 9.6%; YHOO 21%, XCIT 52%, LCOS 18%. The six year range of AOL's PSR (trailing 12 month sales) has been 0.9-6.0, with average of 2.9 and median of 2.4. At its 30 day average price of $82.50, AOL's PSR is 5.28 More importantly, comparing price-sales ratios of Internet stocks is like weighing deck chairs to figure which would sink fastest. ------------------- $/per sub valuation as used in cable is shorthand for multiple of current cash flow. Today that multiple is around 10. Also, cable cash flow multiple valuations are of private market value. The stock prices of publicly cable companies trade at discount to that. The historical average has been 20-25%, although during the past year or so, the discount has been running 35%. The October 06 CableVision magazine, bible of the industry, presents national average per-sub financials for cable. The tables below use that revenue and EBITDA data to value the average cable system as if it had AOL's subscriber base and shares outstanding but cable's cash flow, and compares that to AOL's actuals. Depending upon the method employed, AOL is worth between $1.84 and $16 per share; while cable valued as if were AOL is $114 per share. Obviously, either valuing AOL via cable methodology is not appropriate, or AOL is vastly overvalued. Perhaps it's somewhere in between. But it is certain that more clarity is needed about extent to which AOL's valuation story should be of earnings or of cash flow. annual per sub CABLE AOL REVENUE $ 424 $ 243 = 12 x reported Q4 97 average monthly/sub $16.77 access+$3.47 ad/commerce ------------------------------------ EBITDA $ 184 $ 3 = 4 x Q497 $6.7m/9m subs ------------------------------------ 10 x EBITDA $ 1840 $ 30 ------------------------------------ x 9m subs $16.6b $0.27b ------------------------------------ /116m shares $143/sh $2.30/sh ------------------------------------ 20% Discount = Public Mkt Value $114.25/sh $1.84/sh ========== ======== Obviously, the above result for AOL is out of whack, even for the most ardent bear. The traditional method does not fully allow for significant expansion of cash flow. The discounted terminal value method does. Reflecting the most optimistic expectations, one of AOL's investment bankers (RS) recently stated: "We estimate operating cash flow per share can approach $1.75 in F1998 and $2.05 in F1999" Despite the hedging of "approach", the table below uses those values for 1998-9 and increases thereafter by the same 15% as in AOL's underwriter's 1998-9 estimates. For simplicity, shares are kept constant and debt is not subtracted. FY 1998 1999 2000 2001 2002 2003 EBITDA $203m $232 $267 $307 $353 $406 % change Yr-Yr 0% 15% 15% 15% 15% 15% 10 x 2003 Value $4.1b 1998 12% Present Value Terminal Val $ 2.3b /116m shares = Private Value $ 20/sh 20% Discount $ 4 = Target Public Market Value $ 16/sh =========