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New ratings lower AOL stock

Stock in the largest online service falls after two analysts cut their ratings.

America Online (AOL) shares fell today after two analysts cut their ratings of the online service.

AOL shares fell by 2-1/4 points to finish the day at 35-7/8, down from yesterday's close of 38-1/8. The company had reported its second-quarter earnings after the market's close yesterday, posting a net loss of $155 million compared with profits of $9.5 million a year ago.

Morgan Stanley analyst Mary Meeker cut her rating to "outperform" from "strong buy" on AOL. And Smith Barney downgraded its AOL rating to "underperform" from "neutral."

"AOL is a company with a split personality--it always does good stuff and bad stuff," Meeker wrote in a report. "The good news: AOL has lots of subscribers and high usage levels, or in short, too much demand. The bad news: AOL will lose money again in the March quarter...The good news: Our instincts tell us that AOL is on the cusp of breaking out with a profitable business model (after years of building) and that the stock price (after a lapse or two) should continue its recent steady climb. The bad news: The numbers tell us we are wrong."

Meeker lowered her rating due to several issues. One is that the stock price has ticked up nicely to around $38 from $22 in November. Second is the company's belief that it won't make money until the first calendar quarter. And finally, there's the desire to wait to get some "real visibility" into the promise of the company's business model.

She noted, however, that once AOL starts to post profits, it will continue to roll. Meanwhile, analyst J.D. Padgett, with Chatfield Dean, as well as Alex. Brown reiterated their "strong buy" recommendations for the stock.

"Although accelerated build-out could delay profitability for one to two quarters, we remain focused on the long term. We believe the growing value of AOL's online franchise will drive higher margin revenues from advertising and electronic commerce," Padgett said in his report.

AOL expects to break even in the March quarter and turn profits by June, AOL chairman and chief executive Steve Case said in an earlier interview with CNET.

The company, hit with a string of problems ranging from lawsuits to service outages, said it would have posted a smaller loss of $55 million, excluding a $74.3 million restructuring charge and a $24 million customer-refund charge for offering a new unlimited-service price plan before it had the infrastructure to support it. The refund charge was part of a multistate settlement with several attorneys general.

Analyst Lauren Fine with Merrill Lynch said she was happy to see the company remove most of its bad news in this quarter and finds a better sense of their business plan now exists.

She added that a hold on subscriber growth until additional equipment is put in place to handle the increased demand is temporary and that new service rollouts will further boost the company.