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ANALYST WATCH: Experts still sold on AOL

Even though the market's clearly not impressed, leading Internet analysts are still screaming for investors to buy America Online shares at their current bargain-basement prices. Are these analysts living in the past or ahead of their time?

On July 27, a column titled "AOL at $98 a share a no-brainer" ran in this spot. At the time, it seemed highly improbable that AOL shares would slide any lower.

Almost two months later, AOL is perched around $95 a share, breaking through the $100 mark briefly in August.

The concerns that pushed AOL down from its 52-week high of 175 1/2 in April haven't changed.

Maybe it's Microsoft Corp.'s (Nasdaq: MSFT) apparent commitment to the Internet that has investors on edge. Perhaps it's the possibility of free or drastically discounted Internet service from any number of competitors. And there's always the lingering technological doubts surrounding cable modems and DSL service.

Then EarthLink (Nasdaq: ELNK) and MindSpring (Nasdaq: MSPG) announced they would merge this week, creating an even larger independent competitor for AOL to battle.

Whatever the reasons, most analysts contend this stock has been ridiculously oversold.

AOL keeps growing, despite cheaper competitors

This week, PaineWebber analyst Jim Preissler fired off a research note in which he not only set a 12-month price target of $215 a share, but also valued the sum of AOL's parts at $224 a share.

"To remain on the conservative side though, we are staying with our current 12-month price target of $215," Preissler said.

For its part, AOL said it's on pace to set a record in terms of net subscribers added. That's saying something for a company that already had, at last count, more than 17.6 million registered subscribers.

"AOL continues to be ideally positioned to capitalize on the trends we're seeing in online usage and commerce," said Derek Brown, an analyst at Volpe Brown Whelan & Co. "Those who are worried about the possibility of free Internet service providers are missing the point. AOL has the premium package of content and services for its subscribers."

Brown rates AOL a "strong buy" and said it and Amazon.com Inc. (Nasdaq: AMZN) are still the best Internet investments at this time.

"Something like 70 percent to 80 percent of AOL users stay within AOL's services," he said. "That's something that no other ISP can say."

Most analysts were expecting AOL to add another 850,000 subscribers this quarter. But AOL is now saying it will exceed the 950,000 subscribers it added in the year-ago quarter. In addition, CompuServe has already added more than 300,000 subscribers this quarter.

"AOL has continued to aggressively add subs, despite the emergence of U.S.-based free-ISPs," Preissler said. "Not only is AOL continuing to perform well in its core market, but is emerging as a leader in the value portion of the market with its competitively priced CompuServe brand."

AOL got some more good news Thursday after Microsoft announced yesterday that it was not lowering but raising-raising-the price of its MSN online service $2 a month to $21.95 per month. There was speculation that Microsoft might cut prices.

"After doing further work on the "free access" business model, we are also highly skeptical that it is economically viable," said Merrill Lynch analyst Henry Blodget. "If it becomes viable as network costs decline over the next few years, we believe that AOL will launch a free service of its own."

Some analysts aren't as optimistic. Raymond James' Phil Leigh cut AOL from a "buy" to "accumulate" this week.

First Call consensus expects AOL to earn 13 cents a share in its first quarter and 61 cents a share in the fiscal year.

Of the 45 analysts watching the stock, 41 maintain either a "buy" or "strong buy" recommendation.

New 'Net stock shows analysts' faith in leaders

Adding fuel to the fire, Merrill Lynch on Thursday launched a new security that includes 20 of largest Internet stocks by market capitalization.

The security, called Internet Holdrs, started trading Thursday on the American Stock Exchange under ticker "HHH." It fell 6 5/8 to 101 5/8 in a rough day for Internet stocks of all types and sizes.

Merrill began selling the Holdrs through its retail customer base about a week ago, representing 3.7 million of the shares at $400 million.

AOL, Yahoo!, Amazon.com, eBay, Inktomi and CMGI are just a few of the big-name 'Net stocks in the basket.

This security is different than a fund or a Unit Investment Trust in that investors can cancel the Holdr and take possession of the underlying security at a cost of 10 cents a share.

Considering most of these Internet stocks have fallen between 30 percent to 50 percent from their 52-week highs, the timing of the new security seems quite appropriate.

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