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How quickly things change. Just a little more than a week ago, I wrote a column outlining the pros and cons of buying America Online (AOL) (see BW Online, 1/6/2000, "How Long Will AOL Be the Net's Bluest Chip?"). That story dealt with some of the controversies that were then affecting the stock. Mostly they had to do with the company's strategy: Would the growth in free Internet services jeopardize its subscriber base? Would its AOL Anywhere strategy work? Is it spreading itself too thin with multiple brands? The story also asked readers for their opinions and garnered more than 200 responses -- the vast majority from ardent fans (only seven respondents were negative on AOL stock).
Then a few days later, AOL announced a $183 billion deal to purchase Time Warner (TWX) for stock, and the whole debate shifted. For the moment at least, investors are less concerned with AOL's strategic moves. Their focus nowadays is on number crunching as they try to put a dollar value on shares of a company that by the end of the year will be rechristened AOL Time Warner.
The problem: How do you arrive at a new stock market value when the largest online company pays a huge premium to take over a media conglomerate with a far lower growth rate, price-earnings multiple, and market cap? The new company, essentially 55% AOL and 45% Time Warner, is projected to have higher cash flow, but slower earnings growth. The market's reaction so far has been mainly to take down AOL's stock price. Since the announcement, its shares have fallen 13%, from about $75 to 64 3/8 at the close on Jan. 13, after recouping 4 5/16 points that day.
In a Jan. 12 report, Wit Capital analyst Jordan Rohan lowered his price target on AOL from $105 to $88, but maintained his "buy" rating. Merrill Lynch analyst Henry Blodget estimates that if the merger goes well, the stock could trade at $90 in a year (see BW, 1/24/2000 "Running the Numbers on the Deal,") and the rise Jan. 13 shows that some are using the setback as a buying opportunity.
Fairly soon, the market will digest the new flood of numbers and the stock will start trading again based on the company's strategic plans. And while Wall Street will be puzzling over nuts and bolts, new strategic initiatives that develop from the proposed merger, and quantifying quarterly results, long-term investors will get back to focusing on the big picture.
In the spirit of regaining some long-term perspective, it's useful to go back to the responses from AOL "believers" and "doubters" (in the convention of last week's story), even though they were sent in before the deal with Time Warner was announced. The reasons these mostly long-term shareholders say they plan to stay with, or shun, AOL seem to still apply, despite all the ramifications of the proposed Time Warner merger.
The Believers:
The main reason they love the stock is because they love the service.
Linda Bradley wrote: "AOL is the best stock on the planet. I use AOL every day and I don't think I could live without it. And, if I cannot live without AOL, I know my portfolio cannot live without it." Mizell Campbell added, "The AOL product is very comprehensive and appealing and worth the money."
A few even pointed to how much money AOL has made them -- the stock as well as the service.
Debby wrote: "Yes I own AOL, and for about four years now. And from an investor's side, I love AOL. I also use AOL, which I should add, I get for free every month because I use their platinum VISA card and rack up points. I also use AOL's personal finance channel for invaluable information connected to investing. I would probably pay twice as much per month if I had to." Another reader commented, "I am long AOL stock. With gains I have made, I figure I could subscribe to AOL for a lifetime -- at no charge."
Many said that AOL is so much a part of their kids' lives that its future is all but ensured.
"I have two teenage boys who would be extremely upset if I tried to switch Internet services," writes one reader who thinks only "low-end" AOL users will opt for a free service (a supposed competitive threat to AOL). "If the kids use it, it will make money," writes one fan. "I think AOL is so ingrained in American society already that it is here to stay." Another writes: "Upscale families with children in a comfort zone with the leading brand -- that looks like a winning franchise to me."
They aren't afraid the Free ISP movement.
Many respondents used the phrase "you get what you pay for," and reported negative experiences trying out the new crop of free ISPs. "We might just see a huge influx of return customers to AOL in the future, specifically those dissatisfied with the services the others have to offer," wrote one fan. Damon Cummings believes AOL will benefit if a lot of users get access through a free ISP and then pay $9.95 a month to use AOL. "They are pure gravy for AOL," he wrote. "They are readers and contributors and participants in AOL's e-commerce, but do not require the AOL telephone infrastructure."
Even if AOL is forced to lower its price, they think it will benefit from more subscribers.
"I think the detractors are missing a major point," wrote Len Cava. "If AOL drops its prices, it will gain more subscribers. Just like in TV, more viewers means higher ad rates. Everybody will want to advertise on AOL because that is where the most viewers are."
They are looking forward to the earnings announcement for AOL's fiscal 2000 second quarter on Jan. 19.
Sheldon D. Liber, president of investment firm Capital Innovations in Santa Monica, wrote: "An important milestone is coming up when AOL reports earnings from advertising, investments, and partnerships. If they increase the percentage of revenue from these sources, the free ISP issue will certainly be muted."
They like AOL as a more conservative Internet play, even if it is no longer growing as fast as some other high-fliers.
"Of course they [money managers who are now avoiding AOL] can make more in other places -- but they are looking for dramatic price rises of 100% to 500% in riskier Internet plays," wrote one reader. T.J. Petrarca asked: "What would you rather own in the Internet sector, a new dot.com at $90 a share with nothing but losses for the next two to three years, or AOL at today's cheap price of around $75?"
They are excited about the potential for strong growth internationally.
"AOL is going to have more members in more countries than the world can shake a stick at," wrote one reader.
They respect the management team.
One woman wrote: "Steve Case and Robert Pittman are bigger visionaries than anyone gives them credit for."
The Doubters:
A few reported trouble with AOL's service.
One Burlington (Vt.) user wrote: "I find their service deteriorating to the point of not caring about the continuity of access. I am seriously thinking of selling the stock and moving to another service. Large is not always better for the consumer."
They thought Microsoft Corp. was a threat.
"I think that MSN will get tougher as the days go on, especially after settling with the Justice Department," one respondent said. "They could knock AOL pretty hard if they wanted to lower the monthly fees and give as good service as AOL."
They feel the stock and the service are over-priced.
"I have not changed as of yet," responded one reader, "but I am looking into it as we speak. Unless AOL reduces its fee to $4.95, I'm gone!"
Addendum:
Some readers proved remarkably prescient.
Mysteriously, many wrote on Jan. 6 that they were anticipating a major deal would soon be announced. "Don't forget, AOL is not standing still just as an ISP," wrote Len Cava. "They surprise us everyday with deals!" Another reader wrote, "I would look for a possible link up with someone this year, maybe Intel." Others forecasted a coming "buying spree."
Maybe this just means Internet investors find it safe to assume that yet another big deal is always right around the corner. But it also suggests that, as massive as the deal with Time Warner is, for long-term AOL fans it is just another step in the company's plan to dominate the online world.
Stone is an associate editor at Business Week Online
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