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

To: Chuzzlewit who wrote (4099)	1/30/1999 5:04:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 41369

<You argue that earnings are not important. I agree. But expectations of future free cash flows are important, particularly when the company becomes mature.> Two points. One, free cash flow as you defined it does not capture the full spectrum of AOL's net operating profit. What about the significant monies invested in marketing programs on a discretionary basis. IMO, this investment needs to be added back to cash flow, less the amount necessary to maintain a level ROIC. I do this by capitalizing and amortizing investments (which include R&D and marketing) by the amount of years it historically took the company to realize a return on the monies invested. This way, if the companies investments do not pan out, it is penalized by an appropriate amount. If they do pan out, you get a positive ROIC figure. The second point is that to assume a point that a company becomes a cash cow during its nascency in the midst of one of the most significant paradigm shifts of the century is an exercise in pure academic guesswork (my opinion of course). for instance, suppose AOL bought out a international cable company and Red Hat and became the number one OS vendor in the world by supplanting MSFT and increasing margins by making all delivery over the Internet. They now control world wide media, interactive TV, content and operating systems. This would make AOL severely underpriced right now. Even in our wildest imaginations, many of us would miss that scenario. It is more realistic to adjust the CAPM models to the real world (by modifying the definition of operating profit and cash flow to delete the accounting inefficiencies so often embedded in them) and attempt to use these "real" numbers, projected out to the medium term.