Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Mick Mørmøny who wrote (10166)	6/4/1998 5:52:00 AM
From: H James Morris	Read Replies (2) \| Respond to of 13594

MF, I just read your very bullish response to the Wall Street article. Let us ask you! Who is your employer??

To: Mick Mørmøny who wrote (10166)	6/5/1998 4:24:00 PM
From: Yikes	Read Replies (2) \| Respond to of 13594

This is what's wrong with AOL's ANS deal. In response to MA's message two days ago regarding the "Heard on the Street" article. He wrote: "... The company's treatment of its sale of Advanced Network Services and Excite stock cannot "create extra earnings." It can move earnings from the period in which the gains on sale were realized, but it cannot "create extra earnings." If the gain is "X," it doesn't become a multiple of "X" just because the company's income statement portrays the economics of the transaction as something other than an immediate gain...." This is how the ANS deal "creates extra earnings." Normally a sale-and-lease-back involves hard assets such as buildings or railcars where the assets are not the bulk of a company's core operation. For example, if a company has 25 buildings through out the country, it might sell and lease back 2 or 3 buildings. This provides a transition period in which the company can gradually move out of the buildings, i.e. planning and phasing out the operations in those buildings. In other words, the buldings are true excess that the company wish to be rid of. AOL's sale of ANS is much different. It has a greater impact to its bottom line than the typical sale-and-lease-back. For the first 5 years, the deal will add 5 cents each quarter. This addition is 'borrowed' from future earning because after 5 years, AOL will have to pay for the ANS service. What other network hardware do AOL operate? The ANS sale-and-lease-back inflates the short-term earnings, giving the illusion that AOL's business model is generating $0.19 this past quarter, rather than $0.14. That's why I see it as "creating earning". It hides the fact that AOL's earning growth is slowing down. And worse, at the end of 5 years, the earning will be negatively impacted by the deal. It will have to purchase networking resource from another company. By then AOL will of course have many more subscribers, which will cost more network time and money to AOL. The Excite stock sale has only one problem. Neither AOL or the analysts can predict how future stock sales can add to earning. I just heard on CNBC that Internet companies are cancelling secondary stock offering due to unfavorable market conditions. What if the condition worsen? Even if AOL stock stays up, its stock holding will devaluate and leads AOL's earning lower. As I said months ago, this whole thing feels like a grand pyramid scheme. The expected earnings and stock growth is this pitch: "as long as people buys AOL and related Internet stocks, AOL will keep going up and up." But people won't buy Internet stocks blindly forever. We are now seeing more xDSL and cable modem deployments: PacBell, GTE, and AtHome. The landscape is changing rapidly. Soon AOL will be just another portal like Yahoo!. Finally, AOL is not like Microsoft. Subscriber can easily switch to something faster and better. AOL doesn't have the monopoly, now or ever. Just for the record, I am short AOL. :-)