Price: $146 1/2
12 Month Price Objective: $195
Estimates (Jun) 1998A 1999E 2000E
EPS: $0.28 $0.55 $0.83
P/E: 523.2xx 266.4x 176.5x
EPS Change (YoY): 96.4% 50.9%
Consensus EPS: $0.57 NA
(First Call: 05-Jan-1999)
Q2 EPS (Dec): $0.04 $0.14
Cash Flow/Share: NA NA NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-1-1-9
Mkt. Value / Shares Outstanding (mn): $75,887.0 / 518
Book Value/Share (Sep-1998): $2.34
Price/Book Ratio: 62.6x
ROE 1999E Average: 24.3%
LT Liability % of Capital: 57.3%
Est. 5 Year EPS Growth: 50.0%
Stock Data
52-Week Range: $160-$20 5/8
Symbol / Exchange: AOL / NYSE
Options: Pacific
Institutional Ownership-Spectrum: 73.5%
Brokers Covering (First Call): 33
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: Overweight (28-May-1993)
Market Analysis; Technical Rating: Below Average (28-Dec-1998)
*Intermediate term opinion last changed on 29-Apr-1998.
**The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
* We reiterated our Buy/Buy rating on America
Online shares.
* America Online's operating prospects
continue to look exceptionally strong, and we
believe there could be very real upside to our
current estimates.
Fundamental Highlights:
* The company has attained an operating scale
and a maturity of its business model that is
unique across the consumer Internet space.
* We expect America Online to report its
December quarter operating results on
January 27 th . We believe that the company
will likely exceed our current earnings
estimate of $0.14 per share. We also expect
that America Online will have exceeded the
17.0 million member mark by that time.
* AOL shares remain our strongest
recommendation across the Internet space,
and we continue to recommend purchase at
current levels.
Comment
United States
Information Processing - Internet Software & Svc
11 January 1999
Jonathan Cohen
First Vice President
Tonia Pankopf
Assistant Vice President
America Online Inc
Raising Price Target to $195 BUY*
Long Term
BUY Reason for Report: Company Update
Merrill Lynch & Co.
Global Securities Research & Economics Group
Global Fundamental Equity Research Department
RC#20101118
Stock Performance
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America Online Inc
Rel to S&P Composite Index (500) (Right Scale)
America Online Inc – 11 January 1999
2
We are this morning reiterating our Buy/Buy rating on
America Online shares. At the same time we have
increased our near-to-intermediate term price target for the
company's stock to $195 per share. Our new price target
is based on the application of a multiple of 22.5x our
estimate of the company's calendarized 1999 revenues of
$4.45 billion dollars (the company's fiscal year ends in
June). That multiple is intended to reflect the results of a
traditional DCF analysis, and is consistent with our revised
long-term operating margin assumption for AOL of 20%
(our previous estimate had stood at 15%).
America Online's operating prospects continue to look
exceptionally strong, and we believe there could be very
real upside to our current estimates. We are specifically
focused on the company's average online revenue per
subscriber figure. We note that our current estimate stands
at $4.14 per month per subscriber for calendar 1999, and
$4.15 per month per subscriber for calendar 2000. In fact,
with the benefit of both the ICQ and Netscape deals, we
believe that the figure for 2000 could be substantially an
excess of $5.00.
America Online is the leading worldwide provider of
Internet/online services. Over the past several years, AOL
has both contributed to and benefited from the increased
popularity of Internet communication, and has emerged as
the mass market provider of choice for online service.
We continue to view AOL as probably the single company
best positioned to benefit with the propagation of Internet
connectivity. The company has attained an operating scale
and a maturity of its business model that is unique across the
consumer Internet space. In addition to the scale of AOL's
operations, the company is now positioned to compete not
just against other online content companies, but with
almost any traditional media company. We believe that
AOL is well positioned to extend its leadership position as
online consumers move to adopt new devices and new
technologies for Internet connectivity.
We expect America Online to report its December quarter
operating results on January 27
th . We believe that the
company will likely exceed our current earnings estimate
of $0.14 per share. We also expect that America Online
will have exceeded the 17.0 million member mark by that
time. AOL shares remain our strongest recommendation
across the Internet space, and we continue to recommend
purchase at current levels.
[AOL] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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