The Unlikeliest Internet Play

Bad businesses don't die quickly, even in the fast-moving world of technology. Think about AOL. This about-to-be-spun-off division of Time Warner (NYSE: TWX  ) has been bleeding subscribers for years.

Worth hundreds of billions at the time of the merger, and perhaps as much as $20 billion when Google (Nasdaq: GOOG  ) invested in 2005, AOL is now going to fetch less than $4 billion when released back into the stock market wild. That's understandable. Why invest in a connectivity specialist in the age of broadband, and at a time when fast wireless Web roaming is close to becoming a reality?

The answer's surprisingly simple: AOL and peers such as United Online's (Nasdaq: UNTD  ) Juno continue to make money. Barron's cites reports that say AOL could produce close to $1 billion in 2010 cash flow.

An even better deal
Value hunters must love that; four times cash flow for a business that's still producing plenty of it. And yet scavengers might like EarthLink (Nasdaq: ELNK  ) even more.

The math is equally compelling. EarthLink sports high returns on capital and equity (19.6% and 25.6%, respectively, over the prior 12 months), generates strong cash flows from operations ($214.5 million over the past year), and derives roughly half its market value from cash in the bank.

And the story doesn't end there. EarthLink also uses a portion of its sturdy cash flows to pay a 6.90% dividend yield, well above the less-than-1% payouts from tech stalwarts Oracle (Nasdaq: ORCL  ) and Hewlett-Packard (NYSE: HPQ  ) .

Even so, our 145,000-strong Motley Fool CAPS community remains unsure about EarthLink, rating it a two out of five possible stars. The rest of the details:

Metric

EarthLink

CAPS stars (out of 5)

**

Total ratings

284

Percent Bulls

71.5%

Percent Bears

28.5%

Bullish pitches

33 out of 44

Data current as of Nov. 29.

Years of decline and a virtually obsolete technology explain a lack of enthusiasm for this stock. But skepticism can also be the seed that bears fruit for patient value investors, even in the disruptive world of technology. I like their chances with EarthLink.

But that's also just my take. Now it's your turn to weigh in. Would you buy shares of EarthLink at today's prices? Please visit CAPS and take a moment to rate EarthLink. You can also sound off in the comment box below.

Google is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the market-beating Rule Breakers team. He owned shares of Google and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Oracle and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is still trying to teach the world to sing in perfect harmony.


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