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AOL's mixed bag
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January 30, 2002: 6:26 p.m. ET
It's been two years since the merger announcement. But as Wednesday's earnings release shows, there's still a lot of work to be done.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - Since first becoming a stock-market columnist in late 1997, I've made it a practice not to own individual stocks -- there's just too much chance for conflict of interest. I've always made an exception for my own employer, however, figuring the conflict is already there.
I did nicely on the small amount of Knight Ridder, KRI, I bought at a 15 percent discount through an employee stock purchase plan when I worked for the San Jose Mercury News. I did far less well with shares of TheStreet.com, TSCM, which I bought at the IPO and later on the open market, some of which I still own.
It's with this experience as backdrop that for the past few weeks I've been considering buying shares of AOL Time Warner, which since October has accounted for the majority of my income. (AOL Time Warner is the parent company of CNN/Money.com and Fortune and Business 2.0 magazines, where most of my scribblings appear.)
I've watched with interest -- as opposed to the pain of my co-workers, already AOL shareholders -- as shares have fallen from $32.10 at the end of 2001 to Wednesday's close of $26.40. That's an 18 percent drop so far this year, compared to a 2 percent decline for the Nasdaq.
Surely, I thought as recently as the beginning of this week, when this puppy starts to get down around $27, it's got to be a buy, right?
Some of my sources, however, aren't so sure. One, a fund manager who's profited heavily on AOL's stock in the past, figures that the old Time Warner business -- Time Inc. magazines, networks like CNN and WB, Warner Brothers movies and records, and cable -- are worth $22 alone. That means that the entire America Online business, including $8.8 billion in annual revenue from its 33 million subscribers and online advertising -- is being valued at just $5 a share, or $22 billion. That seems reasonable enough. But still, this source counseled patience.
A look at AOL's results reported Tuesday reveals why patience is a virtue. With reported cash flow (earnings before interest, taxes, depreciation and amortization) of $9.9 billion, AOL badly missed its former estimate of $11 billion. (See more details.) The company holds out little hope for a recovery in advertising markets for the year. And even the supposedly most attractive performance metrics raise doubts.
The number of subscribers for AOL's online service grew 24 percent in 2001 but revenue for the AOL unit grew just 13 percent. Part of that is due to weak advertising and commerce sales. But part suggests that there's a lag between AOL's accounting for its subscriber growth and its revenues. Yes, revenues will naturally lag sign-ups -- but by half? In short, it's key that AOL get more and more money out of each subscriber. But there's no sign of that yet. (For more on AOL's formula, click here.)
Sure, AOL has a sound base in all of its old-economy businesses. But it's certainly possible that more bad news will come out. Advertising might stay weak. Hit movies might not materialize. And as for the AOL service itself -- which was supposed to be the high-growth engine driving the merged entity -- there's a chance consumers wanting high-speed connections to the Internet could very well move on.
On the other hand, it's almost a certainty that nothing will cause the business to get better any time soon. In Wall Street parlance, there are no catalysts.
As for me, I still intend to become an AOL Time Warner shareholder. But I'm in no hurry.
Send e-mail to Adam at adam_lashinsky@timeinc.com.
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