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July 26, 1999

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Subject: Re: Time to sell?
Author: Goofyhoofy

gtremble, your post looks reasonable at first glance, But on reflection I find myself questioning much of it. For instance, you say "I see myself as a long term investor" but then go on to talk about how poorly AOL has done. At today's close, you could not have had AOL for more than 4 months and be underwater, hardly a "long-term" holding. (See the chart below. And keep it handy.)

Week ending  AOL      CSCO      SUNW      ORCL
7/24/98     29 3/4    32 1/4    24        16 1/4
7/31/98     29 1/4    31 5/8    23 5/8    17.49
8/7/98      27 11/16  32        24 1/8    16 9/16
8/14/98     26 1/2    31 13/16  23 1/2    15 11/16
8/21/98     27  9/16  33 15/16  24 3/8    16 7/16
8/28/98     23 15/16  31 1/4    21 1/8    14.19
9/4/98      21 1/2    29 7/16   21 3/8    13 5/8
9/11/98     23 7/8    30 5/8    24  3/16  16.83
9/18/98     24 1/2    30 9/16   24 3/8    17 15/16
9/25/98     28 3/4    33 1/4    26 3/8    19 1/8
10/2/98     26 3/4    27 7/8    21 13/16  17.16
10/9/98     23 1/16   25 1/16   21 3/4    16.83
10/16/98    25 1/2    27 11/16  25 1/8    17 7/16
10/23/98    28 3/4    29 3/8    26 1/4    17 7/8
10/30/98    31 13/16  31 1/2    29 1/8    19 1/2
11/6/98     35        33 3/4    30 5/8    20 3/4
11/13/98    34 15/16  32 3/8    30  1/16  21 7/8
11/20/98    42 3/4    37  5/16  33 3/4    23
11/27/98    47  7/16  40        40 3/16   23 11/16
12/4/98     43 7/8    38 5/8    37 5/8    24 1/8
12/11/98    46        41 3/4    38 11/16  24 9/16
12/18/98    52 5/16   45 1/4    41 3/8    25 15/16
12/24/98    68 5/16   47 1/8    41 11/16  27 3/16
12/31/98    80        46  7/16  42 13/16  28 7/16
1/8/99      72 11/16  53 3/8    45  7/16  30 1/2
1/15/99     73 5/16   50 7/8    50 1/4    31 1/8
1/22/99     70 5/16   51 7/16   49        32 15/16
1/29/99     87 7/8    55 13/16  55 7/8    36 9/16
2/5/99      82        50 5/8    50 5/16   37 1/16
2/12/99     79 1/4    49 9/16   50 1/4    37 7/16
2/19/99     80 3/16   48 1/2    48 1/4    35 3/4
2/26/99     89        48 15/16  48 11/16  36 7/8
3/5/99      86 13/16  50  7/16  52 5/16   37 7/16
3/12/99     96 1/8    51 5/8    51 7/8    28 9/16
3/19/99     118 3/4   52 1/4    55 3/16   27 9/16
3/26/99     125 7/8   52 5/8    58 1/4    27 1/2
4/1/99      150       55        63 1/8    25 13/16
4/9/99      159 1/2   59  1/16  70 1/4    25 7/8
4/16/99     141       52 7/8    54 15/16  24 1/2
4/23/99     146       58 11/16  63  5/16  27 3/8
4/30/99     142 9/16  57 1/16   59 13/16  27 1/16
5/7/99      118 3/16  54 1/4    58 1/16   24 1/2
5/14/99     126       57 3/4    64 5/8    23 7/8
5/21/99     126 1/8   56 5/8    60 3/16   25 3/4
5/28/99     119 1/4   54 1/2    59 3/4    24 13/16
6/4/99      116 7/16  57 7/16   58 1/2    28 11/16
6/11/99     99 11/16  55 7/16   59 11/16  25 5/16
6/18/99     112       59 11/16  64 1/16   35 1/16
6/25/99     102 1/2   61 5/16   64 7/8    35 3/4
7/2/99      115       67 1/16   70 1/16   38 7/16
7/9/99      128       67 1/16   72 15/16  39 5/16
7/16/99     119 15/16 66        76 1/8    39 3/4
(all figures here and below split adjusted...)

I'm thinking your problem is mostly "timing". I'm guessing you got in at the very peak, about 4 months ago. If that's so, you could be down as much as 30% today. With Oracle, you could have bought at 37 and been down nearly 38% in a few weeks time (2/5 to 5/14). Had you bought Cisco at 34 (8/21) you would have watched it shed 26% of it's worth by 10/9. They've come back. You have to decide if you think AOL will.

You have questions about that, obviously. {{Is it Foolish to invest in AOL for the long term, or is it just a "fad"? Soon, internet access will be just like any other utility (if it isn't there already).}}

"Access" may someday be as convenient as a utility, but it's not one. "Utilities" rarely find multiple revenue streams at the consumer end, and generally grow only by adding customers or by vertically integrating back into the supply chain. AOL is doing both! Luckily the supply of customers hasn't run out, and probably won't at least for a while, but they're preparing for the day when it does. They're already in the multiple-brand business, because they recognize that technofolks don't want to be associated with AOL. They offer Compuserve. Soon to offer Netscape Online in Europe. And building the front end for the WorldCom ISP.

They're positioning themselves in advertising, e-commerce, investment, business consulting, the SUN alliance, subscription revenue, equity investment, and so on. Will it all work? Who knows? Will Lucent's Ascend purchase hurt Cisco? Your guess. Will Oracle and Siebel live happily ever after? You tell me. AOL gets the bulk of revenue from subscribers, of course, but also has a growing stream in non-subscriber revenue, and a fair part of that isn't even dependent on having subscribers at all! They have investments in iVillage, Motley Fool, Digital Cities, Tel-Save; they have enterprise software and business consulting, and more.

Please note that I'm not saying that if all the subscribers went away they'd be just fine. Of course not. Anymore than Microsoft wouldn't be hurt if Liniux gained acceptance. But there's a far larger play here than "subscribers", although that's clearly the keynote.

{{AOL is competing with MSN to create the largest community of online followers. Microsoft just released an instant messenger targeted at taking AOL's share of the market.}}

MSN has less than 10% of AOL's subscriber base. Is just launching a messaging product that has no price advantage. Gates has been talking to many people about unloading the money losing ISP service; no takers. Doesn't mean they couldn't compete, they just haven't figured out how yet. A "content" business is gigantically different than a "code" business. Don't be fooled.

{{We all know what happened to Netscape when MS gave away a browser.}}

Yeah. The DOJ finally got off its fat backside and started investigating the Softies predatory and anticompetitive practices. If they're going to start "free" internet service, I hope they find another way to fund it than with their monopoly OS product. That would be, as they say, prima facie.

{{I am simply trying to get a consesus as to whether or not AOL is a Foolish long term buy. In the meantime, I will continue to read good news about AOL & watch my stock plummet.}}

I have no doubt that the stock was overbought on the heels of its multiple splits and quick runs this spring. It seems to be basing around the 100-120 mark. It could be dead money for a while. It could be in for a heap of trouble. Perhaps not. I sold some of mine. I kept a bunch too.

{{Any company that goes head-to-head with Microsoft loses. Also, any company that partners with Microsoft loses. (no monopoly here....) }}

Yes, and perhaps that's why they didn't want to rely on Microsoft to provide them with the OS for "devices", which may be the next step. I can't think of a worse partner, can you? Even AT&T doesn't want to commit to CE exclusively, in spite of the investment (payoff) they took to keep MS out of the MediaOne deal. At first I only saw the benefits of the Netscape portal and the browser to feed eyeballs to it. Now I'm thinking that if you want to be a major player, you better have a building full of programmers so you can keep Mr. Softie at bay, rather than be dependent on him if you need to move to "boxes" or "devices" or whatever and away from PC's. Maybe I'm just paranoid. I hate them as much as you do. Fatware. Microsloth. The dark side.

Hasn't stopped me from doubling my money on them since last year. <g> I'm very happy to have them make a bunch of dough for me even as I refuse to contribute a penny to their revenue stream.

{{But this slump that I have been on with AOL gives me second thoughts about what kind of long term investment is right for my portfolio.}}

Then it's entirely possible this one isn't right for you. AOL has a beta of 1.75, high by any standard. Oracle is 1.40, Cisco is 1.50, and SUNW is 1.30. A 1.00 is average, by definition. I would think you'd be used to the rollercoaster by now.

Finally, just for fun, I went back 3 years:

Sun was at 13 11/16 it's a 5 bagger.
Cisco started at 11 1/4, almost a 6 bagger.
Oracle began at 17 1/16, about a 2 bagger.
AOL priced at 3 13/16, it's almost a 30 bagger.

Some people, of course, will say with that kind of acceleration there's no gas left in the tank. Others, like me, will note that only 50% of American households even now have a computer, and that only slightly over half of those are on-line. The "plumbing" is a good place to be. Out front is apparently even better.

Worldwide it's still wide open, if getting more competitive. Not terribly relevant, but here's a little chart that I keep around to remind me of "the world":
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

If the world were just 100 people:
There would be 57 Asians, 21 Europeans, 14 from the Western Hemisphere (North & South America), and 8 Africans.
50% of the entire world's wealth would be in the hands of only 6 people and all 6 would be from the United States.
80 would live in substandard housing.
70 would be unable to read.
50 would suffer from malnutrition.
1 would be near death.
1 would be near birth.
Only one would have a college education.
No one would own a computer.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

There's a whole huge frontier there yet. ORCL, SUNW, CSCO, AOL. They're all good companies (WorldCom too!), they all have a good future. Only you can decide which ones "fit" for you, and which don't. But 6 months - or less - is hardly enough time to be fair to any of them. They all have aggressive P/E's. Six months from now they could all be in the tank. Or all be on the moon. Funny how it works.