In the past year, shares of the leading online service in
the U.S. have quadrupled from its split-adjusted 52-week low of
26-11/16. On Tuesday, the stock surged 5-1/8 to close at an all-time high of 106-1/4, as the whole Internet sector shot higher.
At a price-to-earnings ratio of 248, that's a hefty price to pay. And yet, analysts still recommend doing exactly that, saying the stock still has plenty of room to climb.
Indeed, AT&T's reported recent overture to acquire AOL for around $130 a share, which management rejected, has given investors a new price target.
"Essentially, AT&T has given you a benchmark value of AOL's worth," said Ulric Weil, an analyst at Friedman, Billings, Ramsey in Arlington, Va.
Quite a turnaround for a company that two years ago was taking it on the chin from users and analysts alike. Under pressure from competitors, AOL in 1996 introduced a flat-rate pricing plan. But the company failed to gauge the demand that would result from the flat rate, and widespread "traffic jams" on the system alienated many subscribers.
At first slow to react, AOL management later moved swiftly to bolster its online capacity. The problem soon receded, and now it's a vanishing memory.
Although analysts can't cite one main reason for the stock's astonishing growth, they maintain that AOL's fundamentals are in terrific shape. "AOL delivers," said Paul Noglows, senior analyst for Internet research at Hambrecht & Quist.
The company recently topped 14 million subscribers worldwide, including 2 million for Compuserve, which AOL bought last year. Many are drawn by the service's ease of use and expanding roster of exclusive content sites in such areas as news, business, personal finance, and sports.
In addition, analysts estimate, close to 90 percent of new subscribers stick with AOL - and have done so despite a recent $2 monthly price increase. Approximately 50 percent of all U.S. consumers who connect to online services from home use AOL, analysts and company officials say.
"The more content you have, the more eyeballs you get. The more eyeballs you get, the more advertising you get," said Weil, who called AOL the "king of the hill" in online services.
Noglows concurred. "It's ready to emerge as the first blue-chip company out of the Internet sector."
With a such a strong brand name, analysts say, consumers are increasingly seeking AOL out instead of the other way around.
Looking ahead, analysts expect AOL to benefit greatly from a steady decline in marketing expenses and a sharp climb in advertising and online commerce revenue. Those two trends will turn the company into a "cash cow" two or three years from now, Weil said.
In the nine months that ended March 31, marketing expenses fell 14 percent to $278.8 million from $323.8 million in the year-earlier period. As a percentage of total revenue, marketing costs fell to 15.4 percent from 26.8 percent in the same eriod.
Advertising and online commerce revenue, meanwhile, jumped to $314.3 million in the first three quarters of fiscal 1998, up 90 percent - from $165.6 million in the year-earlier period.
"AOL provides an audience advertisers can understand and can count," said Noglows, who predicts that subscribership will smash the 20-million barrier by mid-2000.
America Online's stock is also riding on top of the tidal wave of investor interest, propelled in large part by the desire of big media companies to acquire stakes in the rapidly growing online world.
"There's been tremendous momentum in the whole Internet sector," said Shaun Andrikopoulos of Alex Brown & Sons. "AOL is the bellwether. It's one of the few sure bets in the Internet sector."
Written by Jeffry Bartash