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Technology Stocks : America On-Line (AOL) -- Ignore unavailable to you. Want to Upgrade?

To: BomboochaBoy who wrote (1643)	1/6/1999 2:27:00 PM
From: Chuzzlewit	Read Replies (3) \| Respond to of 41369

B-- this valuation stuff depends on a bunch of parameters which aren't even estimates. They are sheer guesses. Here's some info culled from AOL's latest 10-Q: In the most recent quarter AOL had earnings of $108MM, up from $32MM in the same quarter a year ago. That's an increase of 237%, right? Wrong. Operating cash flow increased from $82MM to $134MM, an increase of 63%. Not shabby by any stretch, but certainly not in the league of a 237%. Lets adjust the cash flow growth by the number shares o/s: 1998: $.244 1997: $.163 Now growth is reduced to around 50% per share. I haven't adjusted these figures to reflect free cash flow because I don't know how much of the capital expenses are being used to upgrade existing facilities. I am long AOL, but it seems to me that a healthy word of caution is called for here. Let's assume that when this company becomes mature it will command a trailing P/E of around 27 (which is the average for the S&P500). That implies earnings of $5.56 to justify the current price (using earnings as the benchmark for the moment, rather than free cash flow). So the question ought to be how long will it take AOL to get to that level at 65% pa growth? According to my estimates, AOL will achieve that level of earning in 4 1/2 years if the current rates persist. So clearly the market is discounting significant incremental growth to justify these levels. So, the question I pose to the thread is: from where will this incremental growth derive? Do we really see that incremental growth or are we playing this as a greater fool stock? TTFN, CTC