Tech Industry

ANALYST WATCH: Taking sides on AOL

AOL's first-quarter earnings report helped its stock bounce off its 52-week low this week but financial analysts are decidedly mixed on the company's outlook. To investors, that should be more alarming than the painful sell-off we've seen in the last two quarters.

Even some of AOL's biggest cheerleaders have toned down their enthusiasm for the world's largest online service provider after watching the stock fall from a 52-week high of $95.81 in December to a low of $37 earlier this week.

All this consternation comes just a few weeks before AOL and Time Warner close their blockbuster merger, now valued at around $100 billion, give or take a billion. A deal that gives AOL access to 20 million cable television subscribers to go along with its more than 23 million online subscribers.

Before I get on my soapbox to tell you, the enlightened investors, what a great deal AOL is these levels, let's take a look at the numbers and hear what the analysts had to say.

The numbers don't lie

In the quarter, AOL (NYSE: AOL) beat the Street by a penny a share, earning $340 million, or 14 cents a share, on sales of $2 billion.

That's up from a profit of $182 million, or 7 cents a share, on sales of $1.5 billion in the year-ago quarter.

No one can say, with a straight face, that those aren't impressive numbers. The fact that AOL added another 1.4 million subscribers, or roughly 15,000 a day, in the quarter to bring its grand total to more than 23 million is simply remarkable.

AOL's advertising backlog number, which disturbed some analysts, was $3 billion, roughly flat from the fourth quarter. "The flat ad/commerce backlog and falling deferred revenues should continue to raise questions about online advertising and the future impact on AOL," said Lehman Brothers analyst Holly Becker in a research note.

Other analysts, notably Susan White at J.P. Morgan and Merrill Lynch's Henry Blodget, reiterated their concerns about the state of AOL's advertising base. They also see volatility for the stock in the near-term and are taking a wait-and-see approach to the combined AOL-Time Warner franchise.

However, AOL's advertising and e-commerce sales jumped to $649 million, up 80 percent from the year-ago quarter despite what can only be called massive carnage throughout the Internet sector this quarter. While all these worthless 'Net companies were closing their doors or scrambling for enough cash to survive for another week or two, AOL somehow managed to find paying advertising clients.

Advertsing sales still stellar

As for the $3 billion backlog, sure it would've been nice to see some appreciable growth this quarter but $3 billion is still $3 billion. Ask any other Internet content or service provider or, for that matter, any other company if they'd be disappointed in a $3 billion backlog heading into the next quarter.

AOL Chairman Steve Case is no fool. He sees what's going on within his industry and on Wall Street. As far as AOL is concerned, he said, this decline in advertising revenue isn't much of an issue.

"I know there is a lot of concern among some Internet players but we're not seeing it at all," Case said during Wednesday's conference call. "We are seeing strong momentum with AOL. The top-tier advertisers recognize they have to reinvent their business and make them more Internet-centric, and we'll be able to take that to the next level when we complete the merger with Time Warner."

Maybe Case has become a liar overnight.

AOL said about one-third of its total sales now come from advertising and commerce, up from 24 percent in the year-ago period. Yet, weren't Internet companies white-hot last year? And it's not as if subscription sales are down.

Where is all this money coming from?

Obviously, AOL has moved on to attract more established advertisers with deeper pockets and a more acute understanding of just how big AOL has become. And those that haven't figured it out yet will be AOL clients down the road.

Some analysts had the audacity to stick with AOL despite the fact that it has lost more than $100 billion in market capitalization in the past nine months.

CS First Boston's Jamie Kiggen reiterated his "buy" rating on the stock and a 12-month price target of $80 a share.

"The trend in backlog and deferred revenue reflects a shift to more established advertisers and is not a reflection of slowing ad/commerce momentum," he said in a research note. "The stock should respond favorably near-term to the upbeat outlook of management on the earnings (conference) call."

Goldman Sachs, which still has AOL on its "recommended" list, chipped in by raising its fiscal 2001 earnings estimate to 59 cents a share from 58 cents.

A.G. Edwards analyst Mike Kupinski bumped the stock from a "maintain" recommendation to a "buy."

Chase H&Q's Paul Noglows reiterated his "buy" rating on the stock, mainly on the combined strength of AOL and Time Warner.

"We believe the digital distribution capabilities of a combined AOL Time Warner should put it competitively ahead of other diversified global media players and could result in higher growth rates longer term," Noglows said in a research note. "We believe shares of AOL represent a compelling value."

AOL isn't getting any cheaper

Money managers and individual investors looking to salvage some piece of their rear-ends after this summer/early fall sell-off should stop waiting for the sky to fall and start buying AOL.

With AOL 6.0 due out in the December quarter and AOLTV ready to roll, AOL-Time Warner appears to be poised for a breakout year in 2001.

To all the valuation guys out there screaming into the monitor, AOL is now trading at a price-to-earnings ratio of around 98. Pricey by traditional standards, whatever that means, but certainly not for an undisputed leader in such a high-growth sector.

That P/E compares favorably to the likes of Sun Microsystems (Nasdaq: SUNW) at 100, Cisco Systems (Nasdaq: CSCO) at 99 and Yahoo! (YHOO) at 117.

You can call AOL and all of those other leaders overvalued if you want but every investment house on Wall Street holds most if not all of them as the backbone of their portfolios.

At under $50 a share, AOL should be one of yours.