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Analyst Watch: AOL, Lycos back in favor

Internet darling America Online Inc. (NYSE: AOL) gave investors more cause for celebration this week during its annual institutional investment conference. While the industry sorts out the best way to deliver high-speed Internet access, AOL's content to cover all its bases.

While analysts and industry insiders mull over the respective pros and cons of digital-subscriber lines, cable modems and satellite delivery systems, AOL has established a firm foothold in all three areas.

Granted, what AOL called its "Investor Day" was pretty much a dog-and-pony show but some analysts came away even more impressed with the world's largest online service provider.

"Management repeated that its strategy focuses on all forms of high-speed Internet access, and it will continue to be infrastructure agnostic," said Jim Preissler, an analyst at PaineWebber, in a research report. "It considers broadband an add-on to narrowband, not a replacement cycle. Mobile users cannot take cable or DSL with them, and therefore may continue to require both means of access."

But if DSL does catch on as many believe, AOL will be in fine shape thanks to partnerships with SBC Communications (NYSE: SBC) and Bell Atlantic Corp. (NYSE: BEL).

It's also scheduled to roll out AOL TV sometime next year and, according to Business Week, it may invest up to $1 billion in Hughes Network Systems, which is developing a two-way satellite service called Spaceway.

Robinson-Humphrey was impressed enough by what they heard to start AOL with both a long-term and near-term "buy" recommendation.

Preissler maintains a "buy" rating on AOL, even though it's trading at a price-to-earnings ratio of 259. He also is sticking with his 12-month price target of $215 a share and rates it his "best call."

"We believe AOL's 18 million subscribers could turn into over 35 million once online usage hits maturity with AOL maintaining a 50-percent-plus penetration rate, which would value its subscribers using cable company comparisons at a conservative $200 billion, or about $187 per share," Preissler said.

Phil Leigh, an analyst at Raymond James & Associates, pointed out that AOL's ICQ subsidiary now has 33 million registered users. ICQ is AOL's all-purpose chat organization.

"There is only a 6 percent overlap with conventional AOL subscribers," Leigh said in a research note. "Thus, ICQ represents a large community which AOL is now attempting to monitize."

Preissler said "ICQ could be the preverbial jewel in the rough, that could provide a tremendous amount of value far beyond the amount AOL paid for it."

All this excitement hasn't done the stock a lot of good in the past month. After peaking at 175 and change in April, the stock rapidly fell to around $120 a share.

Last quarter, AOL exceeded analysts estimates in its third quarter, returning a profit of $117 million, or 11 cents a share, on sales of $1.3 billion. In the quarter, it recorded more than $869 million in subscription revenue.

First Call consensus expects it to earn 11 cents a share in its fourth quarter and 33 cents a share in the fiscal year.

All 37 analysts following the stock rate it either a "buy" or "strong buy."

Lycos earnings, outlook bright

Lycos Inc.'s (Nasdaq: LCOS) strong third-quarter earnings report and 2-for-1 stock split gave the stock some juice this week and analysts are eagerly awaiting the next round of merger speculation.

Lycos lost $1 million, or 2 cents a share, on sales of $35.1 million, a 15 percent jump from the second quarter.

Analysts said the stock's recent gains are a reflection of both its strong sales growth and the termination of the USA Networks merger.

Before the deal was scrapped, Lycos shares had fallen from 145 3/8 to the high 70s. Now, the stock is back above $100 a share.

"We see potential for several near-term catalysts," said Keith Benjamin, an analyst at BancBoston Robertson Stephens. "This is another stock we expect to return to and move past its previous highs."