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

To: Glenn D. Rudolph who wrote (15863)	5/8/1999 10:38:00 AM
From: Dan Pence	Respond to of 41369

From 5/8/99 Barron's. An interview with Chaudhri, a tech expert. That's interesting. What's next? A: The second stock we should talk about is America Online. AOL has been the trend-setter in bringing the Internet to millions of people, not just in the United States, but around the world. They have slightly under 50% of all consumer Internet in the U.S. But their incremental market share is actually greater than their average market share, meaning that of the new subscribers who are coming on the 'Net, they are getting more than 50%. Q: Anyone can buy volume by offering a low price, or giving it away. That is the model you reject. A: That model has not worked. In fact, AOL prices are slightly higher than what a lot of others charge. But what AOL offers is, first of all, a branded product that a lot of users are comfortable with. No. 2, they offer proprietary content. No. 3, they offer ease of use and an easier user interface that allows people who are less experienced to get on the Web quickly and to navigate around and do what they need to do on the Web. Q: Branded product. They advertise it? A: Yes. Their advertising has been so successful over the last four or five years that at this point the brand is so powerful that it is bringing in subscribers even though the advertising growth rate has slowed. Q: Doesn't their system crash more than others? A: Those problems are actually behind them. It was most visible a couple of years ago when they had shifted from an hourly subscription product to an all-you-can-eat subscription product. And when that transition happened, the demand for the service went up dramatically over a very short period. At this point their service is actually one of the better regarded services. -------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Q: Why else do you like the stock here? A: These guys have built up a business model. They were the trend setters in terms of creating a business model. The first with subscriptions. And then with corporate sponsorships. Q: What does a corporate sponsorship get you? Is this advertising? A: It is advertising in a different way. It is a more effective use of advertising dollars than trying to make money from banner ads. The corporate sponsorships really represent strategic tie-ins with these corporations. In many cases they are exclusive, or semi-exclusive. For example, you have one corporate sponsor for credit cards on all of AOL, First USA. Q: Meaning it's the only credit card that is offered on AOL? A: Right. And of course that credit-card company gets privileged access to putting their ads on certain of AOL's sites, including in particular their financial sites. But there is another aspect to AOL which we are talking about, which is the international dimension. AOL is already the No. 2 player in terms of Internet access in Europe. In fact, they are the No. 2 player in Germany, they are the No. 2 player in France, they are in the top two or three in the U.K. So they are building up an international presence that I believe is going to be similar to the Internet presence they have in the U.S. Q: The last I looked, the stock was selling at over 350 times earnings. Is this an earnings story? Will the earnings catch up with the 350 multiple? A: This is a growth stock, as well. The stock is up 80%-90%, year to date. I believe that the potential for earnings growth at AOL is 100% annually over the next several years. And my sense is that the stock probably will be in the 175-200 range by the end of 1999. Q: What kind of earnings are you looking for? A: I am looking for earnings of 38 cents a share this year, ending June, on a revenue base of $4.85 billion. And that is about 10% higher than consensus. For next year we are using 82 cents in earnings on a revenue base of $6.8 billion. Q: What did they do for fiscal '98? A: They earned 14 cents on revenues of $3 billion.