Is the sky falling?
America Online Inc. (NYSE: AOL) shares fell below $100 a share Tuesday and you can almost taste the fear emanating from all those Internet bulls who threw themselves on the bandwagon back in April.
But guess what?
While all these weak-kneed, unimaginative souls are selling their positions and rubbing ice on their rear ends, the smart investors are buying large blocks of AOL right now.
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First, let's separate the facts from the phantoms.
There's this growing perception that the entire information technology world is circling around AOL, trying to steal away its huge head start in the online access, e-commerce and advertising markets. Judging from most of what's been said and written in the mainstream press, you'd think AOL was on its last legs, perhaps a month or two away from insolvency.
Rumor has it AT&T Corp. (NYSE: T) is pondering a price cut to its online service customers in a direct attempt to cut into AOL's enormous subscription base which now stands just south of 18 million accounts.
Excuse the naivete, but what makes AT&T or anyone else think that just by cutting a few bucks off its monthly access rate, the entirety, or even a fraction, of AOL's user base is going to cancel and go crawling to AT&T? People don't even want to walk across the street for a cheaper cup of coffee. Plus, they like the coffee they get at their usual place.
We all know that AOL's having some difficulty building much of a subscriber base in Europe. Maybe it's a patriotic thing. If it was called France or England Online, I'm sure the Euros would come around. And they still might anyway.
Let's see where Freeserve is one year from now.
While some companies are focusing on DSL or cable modems as the broadband conduit of the future, AOL has a finger in every pot. They have the depth and cash to either acquire or develop whatever they need to maintain their leadership position in the months and years ahead.
And here's the other dirty little secret: Most Americans, much less citizens of the planet, don't even have a PC in their homes. When they do get one, they're not going to be investing in DSL. They're going to be dial-up customers.
Gateway and Apple and IBM can all cut deals with or acquire ISPs to offer the "bundled" package that consumers seem to want, but that doesn't guarantee they won't eventually look for other value-added services that AOL excels at providing.
What are investors waiting for?
On Tuesday, AOL shares fell to 98 3/16, which as some of you know all too well, is about 44 percent off its high of 175 ? set in April.
The phone lines at brokerage firms are literally lighting up with people buying AOL calls at $120 or $130 a share in August, September, October and November. That means these guys are betting that AOL will at least hit $120 or $130 a share by the time the call options expire.
When AOL does climb to $150 or $170 by mid-November, those with the guts and foresight to recognize AOL's prowess will be able to either buy the stock at those option prices or sell the contract for a tidy profit at no risk.
Or you can just buy the stock right now at $100 a share. Your choice.
Either would seem to be a no-brainer.
In its latest quarter, AOL did what it always does. It beat analysts' estimates by 2 cents a share on sales of $1.4 billion. That's billion with a "b."
Granted, AOL's been worked over quite a bit in the past two months. But before you slit your wrists, keep in mind this stock split 2-for-1 twice in a three-month span between November and February.
Folks, stocks don't go straight up forever. This was going to happen. It needed to happen.
The question is: What are you going to do about it now?
Consider this posting from a message board Tuesday:
"There was a time when everybody wanted to have AOL stock,," said someone called shapal. "AOL was a 'must have stock.' Every fund owned it. Every Tom, Dick and Harry owned it."
You're right, shapal, and there was a reason for it. If you believe in the Internet, you have to believe in AOL. Those sad days of busy phone lines and lousy customer service are long forgotten.
I heard there was some inside trading. That can't be good.
Yes, it's true that a number of AOL executives, including CEO Steve Case, sold a lot of shares and options recently. But they had to.
Case sold 1.5 million shares, only 9 percent of his holdings, leaving him with 14.7 million shares. I guess holding 14.7 million shares of an Internet stock doesn't mean much to nervous investors looking for signs of confidence.
President Bob Pittman sold 1 million shares, leaving him with only 6.78 million to show his faith.
Phil Leigh, an analyst at Raymond James, wasted no time in explaining the insignificance of this inside selling to his clients.
"The insider selling that was reported (Monday) reflects a "backlog" of intended sales over the past eight months as the top management was not permitted to sell until after the quarter in which Netscape was formally acquired got reported," Leigh wrote in a research report. "The Netscape deal was announced last November."
Looking ahead, AOL is expected to earn 13 cents a share in its first quarter and 61 cents a share in fiscal 2000. Of course, tack on another 10 percent or so to that estimate since analysts are consistently underestimating this company.
Will AOL split twice in the next three months? Probably not. But will AOL be trading closer to $50 a share or $150 a share in three months?
"AOL remains the No. 1 consumer play on the Internet," said Paul Noglows, an analyst at Hambrecht & Quist. "AOL's consistently shown that it can adapt and change to the market and the technology. This is an incredible buying opportunity."
A broker at Olde Discount said he's received a lot of calls in the past week from clients wanting to know what's wrong with AOL and whether or not it's time to get out.
"I tell them, don't call me when the stock's throwing up and ask me what I think," he said. "If you're so worried about it, why were you calling me two months ago asking for AOL at whatever price you could get it at? Fundamentally, nothing's changed with this company."
The only thing that's changed is the price.