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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerLast weekend I was cleaning out a box of long-forgotten business research documents and notebooks that have travelled around with me from office to office over the years from Houston to Copenhagen, back to Houston, to Chicago, and ultimately back to Houston. As a broker and portfolio advisor in Denmark in part of 1995 and almost all of 1996, AOL was a company we either directly had accounts in, or, if not, we at least had to refer to it as "the" company to emulate when doing comparative analysis.
I found a Value Line research report from June 7, 1996, just over 10 years ago. Back then, AOL was not only independent, but it was not even listed on the NYSE -- the stock traded as AMER on NASDAQ. It was priced then at $54 and it had already had three two-for-one stock splits. Its market cap was deemed quite lofty at some $5.1 billion.
At that time you had to close your eyes if you were an investor because you almost never got to see the stock pull back that much. If it ever "went on sale" with more than a 10% correction, everyone piled in because they knew AOL was a beast.
This was even before AOL acquired companies with names like Netscape, Compuserve, GNN, and the like. Yahoo! Inc. (NASDAQ:YHOO) had just gone public a couple of months before. Compuserve and Prodigy were the two main dial-up competitors, some online retail stock broker that no one knew the name of (E*Trade) was in the hopper to come public, the prestigious Netscape that had one of the best IPOs in history was in an Internet browser war with Microsoft, and those few who actually had Internet access at home or work were using 14.4 or 28.8 KBPS modems.
On the balance sheet at the time (3/31/96), AOL carried $234 million in current assets and $263 million in current liabilities. Its long-term debt was a mere $21.2 million. Its quarterly revenues were growing 25% each quarter and it had just posted $312 million in quarterly revenues, more than three-quarters of the total sales it had done for all of 1995.
The company was trading with a trailing P/E of almost 150, which was astronomical for those days and even more astronomical when you were trying to explain it to Scandanvian investors wanting in on the Internet boom via US stocks (they were used to P/E's of 10 to 12 as the norm on local exchanges).
AOL had 5.5 million subscribers as of 3/31/96 and Charles Clark, the Value Line analyst who wrote the report, was still trying to justify the valuations and the fact that the stock was up some 2,000% since its 1992 IPO.
I can remember telling accounts that it was a lofty target, but there could be well over 100 million dial-up home Internet accounts in the US, Canada, and Western Europe alone by 1999 to 2000. I also can recall numerous occasions when we were discussing with clients that the stock would be at $100 in the next two or three years. We thought that anyone not buying the stock was the same sort of chap that was buying horse and buggy makers because of the discounts to valuation they were probably seeing in 1908.
AOL derived most of its revenues back then from subscribers paying $9.95 for five hours of dial-up access, and $2.95 per additional hour. The company was still only in the planning stage to launch the 20/20 plan of 20 hours for $19.95.
No one had anything faster than dial-up access. I can recall a Wired or PC-User magazine talking about the emergence of ADSL for a faster web experience and that some companies were trying harder to make the Internet lightning fast through cable television providers, although those speeds were years away from mass deployment.
Here is the conclusion of the Value Line report from 1996: Our System ranks these shares favorably. Though we do not take the competitive threat from the Internet (Netscape), or from others (CompuServe, Microsoft) lightly, AOL has been very effective at targeting the mass market for online services and will likely continue to do so. However, new commitments to this equity should be made carefully and then only by aggressive accounts, given its lofty valuation.
Well, it is needless to note how much things have changed. AOL is now a unit of Time Warner Inc. (NYSE: TWX). It has jettisoned AOL Europe and sold a 5% stake of AOL to Google Inc. (NASDAQ: GOOG) for $1 billion for an implied valuation of $20 billion. The company is now phasing out its paid dial-up subscribers to go to a free ad-based experience. It now ranks third, fourth, and fifth depending on which Internet parameters you are using and which audience base you are using, and that is in US markets.
It is funny when you see how much things have changed in just one decade. It makes you wonder how much different the web will be in ten more years.
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Reader Comments (Page 1 of 1)
11-14-2006 @ 9:32AM
Ray Gordon said...
AOL could have dominated the internet, had it wanted to. It could have even made the web irrelevant. In 1996, they had the same technology that MySpace used to get rich years later.
AOL users could have had "their apace" plus an e-commerce platform that AOL could hvae taken a cut of. In 1996, you could use AOL to send e-mail of up to 16 mb reliably, yet you couldn't do that over the internet, and regular e-mail took forever.
What did AOL DO with this advantage? They kicked off any user who tried to promote a business through AOL, claimed it was a TOS violation, kept their ball and went home, and sent the future entrepreneurs of the internet out to the web and beyond their influence. Five years later, they paid the price.
AOL could have been what Google is now, but they chose not to be because they wanted to exploit their technology for their own profit rather than use it to help small internet compaines grow.
They deserve every bit of their fate, as they were incredibly arrogant in 1996 as they terminated the accounts of what could have become their revenue base.