01:07pm EDT 14-Apr-99 PaineWebber (Preissler, James R. 212-713-2060) AOL
America Online: Hits 17M Subscribers
Internet PaineWebber
James Preissler RESEARCH NOTE
212-713-2060/preissj@painewebber.com
Thomas Bock, Associate Analyst (212-713-3186) April 14, 1999
Richard Choe, Associate Analyst (212-713-2415)
America Online Rating: Buy
(AOL-$159.31)
America Online: Hits 17M Subscribers
KEY POINTS
* AOL announced this morning that it now has over 17 million subscribers,
meaning that in just two months, the service added 1 million subs. In
addition, AOL has over two million subs from CompuServe worldwide.
* The average usage per user per day is now 55 minutes, and continues to
steadily increase even as the user base rapidly expands, providing more
opportunities for AOL to grow its advertising and e-commerce revenue engines.
The audience size now exceeds 1.1m at peak usage, roughly double the prime
time cable television audiences of CNBC and CNN.
* AOL is continuing to top our expectations with regard to subscriber growth
which is a function of both better retention of existing members as well as
continued strong new member acquisition (which is most closely correlated to
the growth of new consumer PCs).
* While growth has finally started to decelerate from the rate of the first
part of 1999 (AOL passed 16 million in early February and 15 million in late
December), it is still well ahead of expectations, and roughly 2x the rate of
the comparable period in 1998. In April, 1998, AOL was on a pace of roughly
8,000 sub/day as compared to this year's 15,500 subs/day (see table below).
* If AOL keeps this rate of approximately 2x last year's pace intact, this
would put it on track to add 14,000 subs/day over the next couple of months.
At this rate, AOL would reach 18m subs in the of last week of June to the
first week in July. We do expect the pace to slow as summer has historically
been a slower growth period (less new PCs purchased, hopefully people go
outside, etc.). Therefore, we believe a more reasonable pace could be 10-
11,000 subs/day (still, tremendously strong growth), which would put AOL on
track to hit 18m in mid-July.
* We reiterate our Buy rating and price target of $215 using a sum of parts
valuation method. AOL continues to be our Analyst's Best Call.
Key Data Quarterly Earnings Per Share (fiscal year ends June)
52-Wk Range $168-18 1998A 1999E Prev 2000E Eq.Mk
.Cap.(MM) $160,903 1Q $0.02 $0.07A
Sh.Out.(MM) 1,010 2Q 0.02 0.08A
Float 68% 3Q 0.04 0.10E
Inst.Hldgs. 61.4% 4Q 0.06 0.10E
Av.Dly.Vol.(K) 16,410 Year $0.14 $0.35 $0.49
Curr. Div./Yield None/NA FC Cons.: $0.34 $0.53
Sec.Grwth.Rate Revs.(MM): $2,600 $3,998 $5,290
12-mo. Tgt Price $215.00 P/E: 1137.9x 455.2x 325.1x
12-mo. Ret. Pot'l 35.0%
Convertible? No
WE REITERATE OUR BUY RATING AND $215 PRICE TARGET BASED ON A SUM OF PARTS
VALUATION
We believe AOL's 18 million subscribers could turn into over 35 million once
online usage hits maturity with AOL maintaining a 50%+ penetration rate, which
would value its subscribers using cable company comparisons at a conservative
$200 billion, or about $187 per share. Furthermore, AOL's web properties,
including Netcenter, ICQ, etc...) has the largest reach on the Internet and
strong usage metrics, according to Media Metrix. Accounting for synergies from
the AOL network, especially on the cost side, we believe that we could make a
strong case for these Web properties to be worth as much as Yahoo's properties.
Though Yahoo had a market cap of $34.3 billion on 3/29/99, we had a price
target of $110 on YHOO before the Broadcast.com acquisition, so we will use a
$22 billion valuation for the Web properties, or an additional $21 per share.
In addition, we think AOL's Digital City and Moviefone businesses could be
worth $4 billion in market cap or $4 per share. Netscape's enterprise software
business, we believe, should sell at conservative 3x estimated 2000 revenues of
$640 million, or roughly $2 billion of incremental market capitalization,
adding another $2 per share.
Totaling the sum of the parts of the AOL network of properties, we arrive at a
potential worth of $215 per share, or $230 billion of market cap. Still, we do
not think we are aggressive in valuing AOL's worth and upside remains. For a
more detailed analysis of our valuation please see our note dated 3/30/99.
HISTORICAL SUBSCRIBER GROWTH
Date Subs Days Adds Adds/Day
12/31/97 10.725
1/20/98 11.000 20 0.275 13,750
3/31/98 11.873 71 0.873 12,296
4/16/98 12.000 16 0.127 7,938
6/30/98 12.535 74 0.535 7,230
8/27/98 13.000 57 0.465 8,158
9/30/98 13.486 33 0.486 14,727
11/12/98 14.000 42 0.514 12,238
12/28/98 15.000 46 1.000 21,739
2/9/99 16.000 41 1.000 24,390
4/14/99 17.000 65 1.000 15,385
RISKS
AOL competes in a highly competitive as well as rapidly changing marketplace.
Any failure in execution could dramatically impact its revenues. The company
could potentially compete with a number of larger competitors such as
Microsoft, IBM, and others, who all have significantly larger resources, sales
organizations, and customer bases. Potentially, an interactive service based
upon high-speed access technologies could present a competitive threat if AOL
were slow to respond. Any deterioration in subscriber pricing or a significant
loss of subscribers could dramatically impact future revenue. In addition,
advertising and transactions on the Internet are an emerging business, with
little forward visibility.
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