AOL Continues to Dazzle

If there is any logic to the market’s mood these days, shares of America Online Inc. should surge in the wake of yet another outstanding quarterly report.

After all, AOL (AOL) has everything that sobered-up investors supposedly want in the wake of the recent (and perhaps still current) sizable correction in Internet and high-tech stocks: It’s a market leader, has a long record of strong growth, and keeps turning out quarterly profits (yes, profits) that easily beat the street.

Indeed, among Internet stocks, AOL is seen as a leading destination among panicky passengers boarding the suddenly overbooked Flight to Quality.

But in after-hours trading, AOL had gained only about 4 percent from its Tuesday closing price of 60-1/2. Maybe things will heat up in Wednesday’s trading. However, a look at the past few quarterlies indicates AOL’s earnings reports have produced no major short-term boosts for the company’s stock price.

In January, for example, AOL easily matched analysts’ optimistic estimates for revenue, subscriber growth and earnings. Yet shares drifted downward in the days following the announcement.

Last October, AOL shares rose only slightly in the week following the company’s earnings report, though by early November they were soaring toward eventual all-time highs in mid-December.

And last July, shares of AOL fell after another impressive quarterly report.

Perhaps you can discount January’s market reaction, as AOL less than two weeks earlier had announced plans to purchase Time Warner. The bombshell sent the company’s stock into a tailspin that was well under way by the time quarterly numbers came out on Jan. 19.

Still, there’s a common thread linking all three previous AOL earnings reports and the subsequent reaction: In each case, AOL’s stock continued to move in the direction it already had been heading in. Shares were headed south in January and last July, while they were rising in November.

The difference now, though, is that the direction of AOL’s stock movement is unclear. Shares slipped over the past month, but less than virtually any other Internet company. Last Friday, when the rest of the Internet world was freefalling, AOL slipped by a relatively minor 6 percent. Since then, it has gained ground for two consecutive trading sessions.

Not much to grab onto there, but it really doesn’t matter, because AOL’s value continues to be in the long-term. Revenue in the fiscal third quarter ended March 31 was $1.84 billion, up 47 percent from the $1.25 billion in the year-ago quarter. Profits for Q3 reached $271 million, or 11 cents per share.

In contrast, Yahoo (YHOO), the second-largest pure Internet company, just reported quarterly revenue of $228 million and a net profit of $63.3 million, or 10 cents per share.

And while some analysts say AOL’s subscriber growth rate is slowing, so what? It’s still snapping up more subscribers than anyone, with 1.7 million more signing on in Q3, bringing membership to 22.2 million, despite the alleged threat of free ISPs. The nearest competitor? EarthLink (ELNK), with 3.1 million subscribers.

Further, AOL is moving aggressively to reduce its dependence on domestic monthly subscription fees, which comprised 64 percent of its Q3 revenue, down from 83 percent just six quarters ago. Meanwhile, revenue from advertising and e-commerce more than doubled to $557 million in Q3.

Bottom line: AOL continues to make all the right moves, and continues to demonstrate an ability to create and fine-tune a profitable online business model, more than any other Internet company. An investor can’t a

sk for much more than that.

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