AOL: R.I.P.?

Nothing thrills me more when Barron’s trashes a Net stock. As far as
I’m concerned, Barron’s is a great Net stock contrarian indicator.

Of course, this week Barron’s has America
Online Inc.
(AOL)
in its crosshairs, as hedge-fund manager Doug Kass gave many reasons to be
bearish.

He sees lots of competion, such as from the so-called
free-providers (Freeserve and NetZero), as well as potential free ISP
services from AT&T and Microsoft.

He points out the many insiders have been
sellers of stock of AOL. He also says that there has been a slow-down in
subscriber growth.

Okay, while it’s true there has been much insider selling, this is not
necessarily a good indicator. Insider selling is not as strong as insider
buying (there is usually only one reason for an insider to buy stock:
because he or she believes the stock is going to increase).

There are many
possible reasons for insider selling: divorce, buying a house, purchasing a
new car. In other words, it may not be because there is a belief the stock
will fall.

So, what about price pressures? True, there are always price pressures,
especially on the Net. But I think this will be gradual for AOL.

The fact is that AOL has the preeminent Web brand. While theoretically no
company owns the Net, AOL nonetheless comes very close. In fact, many
consumers think that AOL is the Net.

Because of its incredible brand, the company does not have to spend huge
amounts on marketing. This means a fatter bottom line. For example, sales
and marketing expenses have declined from 22 percent of sales in 1997 to 14 percent of
sales in 1999. What’s more, AOL’s churn rate has been falling — going from
50 percent in 1996 to 20 percent last year.

Basically, this means that AOL will continue to get a tremendous amount of
subscribers. At last count, the company had nearly 18 million customers.
And these users love the service, spending about 52 minutes per day online,
which is up from 44 minutes a year ago.

Remember: The next several hundred users who get on the Web will not be
tech savvy and thus will want to have a simple way to surf the Web. This is
perfect for AOL.

Besides, AOL is shifting its revenue towards e-commerce. Such companies as
eToys, Medcast and drkoop.com have signed multi-year contracts for huge
sums to have exposure on AOL. They would not sign such deals unless they
were very certain of the future of AOL.

This is not to say that AOL is home free. There will definitely be
challenges. But the management team has been through many battles before —
and always seems to prevail. I’m sure they’ll continue to do so.


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