Mike, for the AOL longs....AOL Rides Its Credibility to Blue-Chip Status
By Cory Johnson
West Coast Bureau Chief
4/5/99 5:28 PM ET
There once was a time when America Online (AOL:NYSE) was the embodiment
of all that a Net stock was -- in other words, a profitless company, full of hype, with
a ridiculously inflated stock price. Moreover, the critics liked to carp that America
Online had second-rate management, third-rate technology and fourth-rate
bookkeeping ... the long of it was a short. And how: At one point, AOL was among
the most popular short targets on Wall Street.
These days, the shorts are lucky if they've kept their white-collared shirts. Since
the end of the fourth quarter of 1997 -- America Online's last profitless quarter --
the stock is up 1,226%. Yes, $10,000 invested in AOL 15 months ago would've
netted you about $122,000, while a $10,000 short would've netted you a job at
McDonald's (MCD:NYSE).
But here's the rub. AOL's stock-market success story is not the tale of a Net
stock turning a profit and gaining Wall Street's favor. Rather, it's a tale of a Net
stock that is no longer considered a Net stock. To Wall Street, AOL has become
the Internet's lone blue-chip.
"This stock was absolutely vilified by the investment community two or three years
ago," says Ryan Jacob of the $340 million Internet fund. (His own fund was among
those that initially stayed away.) "But these days, in my mind, portfolio managers
now look at AOL in the same vein as a Coca-Cola (KO:NYSE) or a Gillette
(G:NYSE)."
In terms of size at least, America Online is a behemoth. No other Net stock
comes close to its 934 million shares, or its $154 billion market capitalization.
Need further proof that AOL doesn't really have a peer group? Think of the biggest
Internet stock you can. And then another. And another. AOL is still bigger: Its
market cap is more than 90% larger than the combined value of eBay
(EBAY:Nasdaq), Amazon.com (AMZN:Nasdaq) and Yahoo! (YHOO:Nasdaq).
The triumph of AOL's business model has been
trotted out far and wide. But AOL's success in
shedding the stench of its Internet brethren has
been just as impressive. About three years ago, the
company began taking some savvy steps to woo
Wall Street.
AOL buried one consistent complaint about its
accounting by taking a painful, but one-time hit to
earnings. The company was roundly criticized for
amortizing marketing expenses -- like those
annoying discs it mailed to the universe --
sometimes stretching out those costs over two
years. This was an affront to conservative financial
types, the kind of impending disaster that draws
short-sellers out of the woodwork. In October 1996,
AOL finally gave up defending the practice and took
a one-time charge of $385 million to write off these
deferred costs.
Hiring dazzling management hasn't hurt either. When AOL hired Bob Pittman --
not only a former Time Warner (TWX:NYSE) and Century 21 muckety muck, but
also a former disc jockey -- it found a guy who talks the Wall Street talk. As the
corporate pitchman, he had no peer among garage-band Net companies. "Retail
investors don't get a chance to see this, but management of this company is just
so impressive," says Brian Hayward, manager of Invesco's $407 million
Worldwide Communications fund. Hayward managed an impressive 41% return in
1998, with America Online, his largest holding, pacing the way. "By Wall Street
standards, Pittman might not be the best," Hayward says. "It's not so much that
he's as impressive as, say [AT&T (T:NYSE) CEO] Michael Armstrong, but in the
Internet space, no one comes close to AOL's management."
America Online also took the unusual step on Sept. 1, 1996, of leaving the
Nasdaq for the venerable New York Stock Exchange. While bigger tech players
like Microsoft (MSFT:Nasdaq), Intel (INTC:Nasdaq) and MCI WorldCom
(WCOM:Nasdaq) were all content with Nasdaq, AOL sought the prestige of being
listed alongside the Citibanks and Con Edisons of the world. Street credibility
followed in suit.
The coup de grace came with AOL's Dec. 22, 1998, addition to the S&P 500. S&P
500 index funds, like Vanguard's $78.1 billion behemoth, had to pony up for AOL
shares. More so, while mainstream funds could choose to ignore the eye-popping
gains of Net stocks, they couldn't ignore the S&P 500. "At the end of the day, your
benchmark is the S&P," says Jacob. "The fact is, now that AOL is in the S&P,
active fund managers have to deal with it."
Are any other Net stocks on their way to blue-chip status? There's no consensus,
though money managers cite Amazon.com and Yahoo! as contenders. But for now
AOL shares stand with no one. "For the last two years, there's been only one
stock that active fund managers felt comfortable with," says Jacob. "And that's
AOL." |
