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

To: Investor-ex! who wrote (8275)	2/25/1998 10:35:00 PM
From: Jason Cogan	Read Replies (2) \| Respond to of 13594

Investor-ex! <<Wall St. really makes no sense at times.>> I agree wholeheartedly with your sentiments. Wall St. does indeed get out of whack with fundamentals at times. Our beloved AOL is a perfect case in point. But I do not believe that the rules morph as the business cycle changes. Rather, sometimes the consequences of "The Rule" takes longer to materialize. At the very core of the stock market, lies Capitalism, which begins and ends with capital(be they dollars, marks, yen, etc.) There is really just one simple rule, and then a whole bunch of developments that feed "The Rule." The Rule: "Give me some of your capital, and I will give you back more. If I don't do a good job at this, you will take your capital away and give it to somebody else." As laymen, we usually think of returns on capital as just that, in percentage terms. But the rules of the game still apply. If the company whose shares we own don't do well, people will sell them. And once they start selling, we all know where the price goes. All of this brings us to our lovely AOL. A look at the cash flow statement, the only true, non manipulated statement from management, shows how AOL is doing. Over the last six months they earned $150 million from operations on revenues of about $1 billion. But they also spent $180 million on things they classify as investments. Software development costs which include such things as salaries and computer hardware. In other words, things not likely to go away any time soon. So on a cash flow basis, AOL appears to be losing $30 million. All this while growing members, which apparently just lead to further unprofitability. Now I'm not saying AOL has no value. It clearly does, despite the protests about bad service, incorrect pricing, power outages, and accounting manipulations. Clearly, 10 million active consumers and growing has value in today's digital economy. But is that value $15 billion? (which is essentially AOL's market cap after figuring in all the option dilution). I clearly think not, and that's why I am short calls on this company. But in the long run, my opinions don't matter. Nor do any of the analysts, or the AOL members, or even Steve Case and Bob Pittman. Because in the long run, only the rule of capitalism matters. If AOL doesn't return enough capital, it's not worth $15 billion. How much capital does AOL have to return for it to be fairly valued? Basically, I figure about $15 billion, over the next five years. That's about the same return you or I would demand if we gave somebody $1000 dollars. About 20% a year, ignoring compounding. And that's a tough order to fill, especially for a company from a standing (or even negative) start. If they don't, the shares will not be worth $15 billion. They will be worth less, maybe considerably less. Capitalism does not exist in a vacuuum. I encourage any and all thoughts. AOL is certainly worthy of discussion. Regards, Jason Cogan