eMailbag Monday: AOL, eBay, StarMedia, ecorp Australia
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First reader up this week writes:
"You said in a column a month ago that our children would look at us funny if we didn't own AOL. Is AOL still the powerhouse you thought or is there a fundamental change going on?"
Reply: Of all the Internet stocks, I see AOL as the leader with the most leverage. Here's what I like about it: 1) largest ISP in the world with 17 million people paying $21.95 month; 2) Netscape (the Web site and software); 3) ICQ, the instant message service with more than 30 million users; 4) capital to ride out interest rate storms 5) stock to acquire with (which AOL has been too quiet with I think).
Risks and downsides that AOL needs to address: One of the larger issues facing AOL is one I brought up way back in the quiet years of January 1998: broadband strategy and high-speed distribution. I suggested then that AOL should have acquired cable Internet service provider @Home. Too late now, AT&T owns majority through its buy of TCI.
AOL chose to go the court battle way with its "open cable" argument (which may or may not succeed). I think AOL buying into the cable franchise world is a better move.
AOL was in the dial-up network business and built critical mass that way. It should think of broadband as a new business which it needs to build up in similar evolution. That means AOL owning a cable system or two, or three.
AT&T, Paul Allen's Vulcan Ventures, Microsoft, they all get that owning a cable stake is leverage.
Showing up with 17 million dial up subscribers is valuable but AOL ought to cut a deal with some cable firms and get going. I think cable should be open to those that want access but only open for those willing to pay to upgrade the cable system to be able to handle two-way data flow.
AOL has the cash, cache, and stock as currency, maybe it's time to cut some deals with Malone, Turner, Redstone and/or Levin. I could see an AOL-Time Warner powerhouse combine, especially with Time Warner's Road Runner cable Internet.
Drop From The Top
"How much more of a correction do you see in the Internet sector, especially the bellwether ones, yhoo, amzn, aol, etc.?"
Reply: As a group these three are down a blended 47% from their 52-week highs. Amazon.com (NASDAQ:AMZN) fell the most, off 52%; AOL (NYSE:AOL), down 43%; Yahoo (NASDAQ:YHOO), off 45%. eBay (NASDAQ:EBAY) fared a little better, down "just" 29% from its high.
That's a big correction into bear territory for the group. I think a lot of the drop owes to interest rate hike fears being discounted into Internet stocks.
Most of that may be present in the valuation now but if rates move north then I think we could see perhaps 10% softness to come as summer slowdown also comes into play more. It depends on interest rate moves more than anything.
The other question is when does the correction reverse, or does it? I think Fall may be a turning point as the sector has been beaten down so much yet the underlying industry keeps growing in every direction.
In a bearish-like market I look for industry fundamentals to support values. It's also important to remember that these companies and the cash they have, each considerable. AMZN, through its bonds sold, for example, has enough cash to buy an island or a chain of islands.
That's the biggest oversight that Barron's had when it slammed Amazon two weeks ago and called it a $10 stock. AMZN has more than that in cash per share, per its bonds.
"Steve, I know you are bullish on StarMedia. Please compare and contrast the competition for the five c's in Latin America. Thanks for all of your research and insights. Keep up the good work!"
Reply: The five C's I see for successful portal Internet experiences = content, commerce, community, communication, and context. StarMedia has them all in my opinion, to which I would now add "capital." Six Cs of success, or at least a better chance of success. That said,at its current $2 billion market cap I think STRM may be fairly valued with these factors until we see some growth in quarterly results.
There are regional rivals but nothing as comprehensive as StarMedia. AOL/Cisneros Group is the only one I see providing a hint of competition to StarMedia not now but in the future. Others in various countries could beat StarMedia in their own countries but it will take large amounts of capital -- and most don't realize that.
"Hi Steve, love your work! I'm not sure if you follow stocks listed on international exchanges but on June 15th an Australian holding company called ecorp is listing on the Australian stock exchange. It's very interesting because it has the ebay licence for Australasia, its the first JV Microsoft has done outside of US - with PBL; Australia's largest media company and they've bundled a few other companies in including an online stockbroker and ticketing company. Overall its a very interesting offering in that it could prove a great way for an overseas investor to buy a portfolio of Australian Internet properties from CarPoint to online stockbroker all in one!"
Reply: ecorp is an offshoot of Australian media magnate Kerry Packer's empire. Used to be called Publishing and Broadcasting's PBL Online. A name change in April brought attention to the unit, which plans to sell 20% to the public in Australia June 15 for $120 million Australian or $1.20 (Australian) per share. In Australia, ecorp's ipo is reportedly 15x oversubscribed with high demand from retail and institutional buyers.
ecorp owns 50% of ninemsn, a joint venture with Microsoft in Oz and also a similar 50-50 venture with eBay.
ecorp also owns two Internet businesses, Ticketek and Online Broker Holdings, known as ShareTrade Australia Stockbroking. While ecorp has had a lot of interest Down Under it is also important to put in context to its market potential at this time: the market for Internet services in Australia is behind that of the U.S. and the overall population is less than 10% of the U.S.
However, there's nothing keeping ecorp from being an Australian-only Internet firm, except its management, capital and thinking. Just as most U.S. Internet efforts are global by default, thanks to the Internet's intrinsic nature.
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