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

To: Jorge who wrote (11615)	10/27/1998 8:24:00 PM
From: Jason Cogan	Read Replies (1) \| Respond to of 13594

George: <<As an investment forget MSFT and invest in AOL, at least for the next 3-5 years....You'll make a much more OBSCENE amount of money in AOL as you would in MSFT.>> You are starting to believe too much Wall Street hype. Please outline the business case that makes AOL even close to a DELL or MSFT. Do you really think that a company with $50 million of questionable earnings (after eliminating the network services credit) is really worth $33 billion? If AOL goes much higher, it's worth more than content providers such as Disney. Do you really think this makes sense? Regards, JC

To: Jorge who wrote (11615)	10/27/1998 8:36:00 PM
From: Buster O. Hype	Read Replies (2) \| Respond to of 13594

AOL vs. MSFT comparison Important point to remember are the margins in their business. AOL has about 37% gross margins and less than 20% cash flow margins. In contrast Microsoft is about 2X to 3X better in these important fundamental points. That's why the street rewards Microsoft with a price to sales ratio of about 18. AOL's revenue growth is actually decelerating on a quarter to quarter basis and this is normal for a company that's now makes more than a billion dollar annual revenue. I would expect its revenue growth to decline to the 40% level which is still good. But then, there's really no way for them to grow their margins. After all, they are not a monopoly like Microsoft and it costs a lot less for Microsoft to produce software than for AOL to support a user. A reasonable but still generous valuation for AOL is 40X cash flow which implies about 7X sales. It's now a $30 billion company. I'm looking at sales of about $4 billion in the next year. I would say they're fully valued as of now and I would consider initiating a short position if they jump to the $150 level.