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

To: Chuzzlewit who wrote (3886)	1/28/1999 3:05:00 PM
From: Smart Investor	Read Replies (1) \| Respond to of 41369

If you think AOL can not justify its price, what about YHOO,AMZN, eBay? AOL is the only relative safe internet play with a reasonable valuation!

To: Chuzzlewit who wrote (3886)	1/28/1999 3:31:00 PM
From: PDL	Read Replies (1) \| Respond to of 41369

Chuzzle... There is no way (really) to justify AOL's current market cap. on a fundamental basis -- that's what's driving the traditional analysts and talking heads so batty. The company is currently trading at around 20X Sales revenue (I'm estimating $4 billion in current year revenues -- maybe it will be more) and 500X earnings. The key question in the internet stocks is: what is a subscriber going to be worth in the future? AOL dominates the "subscription" market today (many sites, portals and search engines are "free" and have to make all their revenues on ad $ or other fees) -- 17MM subscibers (households) and I'm guessing they generate about $25/HH/month in revenue (I'm not sure how many of the 17MM are on a free-trial). Most of that revenue is, obviously, the subscription fee. The balance is advertising or some small amount of transaction fee. Up to this point, the advertising model has been a big disappointment and has failed to yield much in the way of revenue. The big lever here is what happens if transctional fees start to mount and companies like AOL can capture part of that. So to use your estimates -- but with a little "shaving" for reasonableness: There are around 104MM households in the US. Assume ultimately 80% will connect to the internet. And assume AOL continues to dominate and can capture 50% of that market (for subscribing households): that's 41MM households [by the way, I think the biggest barrier to entry is the current subscriber base and their loyalty to AOL -- not wanting to switch emails, having established a network of on-line pals, etc. -- and the tendency for this subscriber base to recruit new members. Be wary if subscribers are ever given an opportunity to "take their e-mail ID's with them" as they switch services]. At $25/HH/month, this 41MM households would generate $300/yr in revenue or $12 billion per year. Even assuming this level, AOL is pricey at a CURRENT 6X revenue market capitalization (assuming an 8% after tax margin at $12B in revenue and you would have $1 billion in after tax profit -- so AOL is currently valued at 80X even that level of earnings). But if AOL ultimately generates an additional $5/HH/month or $10/HH/month on advertising and transaction fees, then this becomes huge revenue [and more important PROFIT] leverage. You still need some heroic assumptions to make a strong case for AOL at today's stock price on any king of traditional fundamental analysis. But being the leader in such a dynamic marketplace, and having all the potential leverage implicit in the internet -- this is why the far-sighted fund managers are starting to get on board. The internet is like the integrated circuit -- I don't think anybody knows all the potential that will ultimately spill from its development. But in the meantime, AOL's ability to capture such a large percentage of the internet's subscribers -- with the huge potential "lifetime value" of each subscriber -- that's what allows investors to dream of even higher valuations. Bottom line: I can't make a good fundamental case for AOL at this point in time. I've only got a small stake (that has grown 100-fold since mid-1994) but I'm pleased as heck to have that. I worry about this bubble bursting -- and no investor should take for granted that this kind of trend (since fall) can continue -- everyone on this board should be prepared for a major correction within the next few months. But I'm long and I plan to stay long -- this is how small (or even large) fortunes get made in the stock market. JMHO.

To: Chuzzlewit who wrote (3886)	1/28/1999 3:55:00 PM
From: Boplicity	Respond to of 41369

Chuzz, It's you theme for you today, you worried I see, fear is good it keeps things from getting out of hand, but it can also cloud your vision if you let it. I love to read your post, you have educated in many areas, but your too cerebral when comes to the market. It's what the current rage is, that makes a stock move. I'm sure you remember the beta and alpha, candle sticks, etc etc craze for TA, then biotech for sectors, on and on. The trick is to find that sector before others do. An investors is buying potential, an investor should sell when they see the potential disappearing. There is no one on this planet that can understand the market and predict what is going to happen, unless they have figured out how to predict human behavior, they are all blowing smoke otherwise. Greg

To: Chuzzlewit who wrote (3886)	1/28/1999 4:55:00 PM
From: musea	Read Replies (3) \| Respond to of 41369

Chuzzlewit, I have to agree with you about the price today, although I suspect that when/if AOL makes it to the "mature dominant" stage, only a small percentage of its income will come from subscriptions. I am trying to put together the right model, but the big variable is the money it makes from its percentage on e-commerce through its various affiliates, advertising and value-added services. If the valuation were at "reasonable" levels, now would be the time to invest in AOL. Its probability of eventual success is reasonable, its business plan looks solid and its management seems excellent. You would be buying in "ahead of the curve," so to speak, and it would be worth the risk. I would buy AOL much as I bought MSFT, DELL or INTC before they were sure things. In fact, I did put my money where my mouth is and bought AOL in early October. The share price growth since then is ridiculous, not that I'm complaining. I suspect that your estimate of future revenues is low and your estimate of the number of subscribers is high. We shall see when the time comes. -musea

To: Chuzzlewit who wrote (3886)	1/28/1999 5:43:00 PM
From: LindyBill	Read Replies (1) \| Respond to of 41369

Chuzz, Disneyland is a good example of AOL today. They charge to get in to enjoy the attractions, and make a fortune on the merchandise. That's what AOL is doing. I think the future will be a totally free, 24 hour a day, Internet connection. Think of AOL as a shopping mall, filled with shops. The mall doesn't charge the customers to come in, they spend money to get them. As competitive pressure drives down monthly charges for connection, revenue will rise from business's on the net. Some free services are already out there, using advertising to pay for them. This will explode, and AOL will have to meet them.