Fool Portfolio Report
Tuesday, October 24, 1995

Every single one of our stocks, accompanied by a load of Ego from Fool HQ, hopped a-back America Online (NASDAQ:AMER) and we all rode nearly a full percent ahead of the Standard & Poor's 500 today. The Fool Port rose 1.24% to 1995 returns of 52.86% versus 27.72% growth for the market. Man, is it easy being an individual investor, or what?

America Online shot ahead $3 5/8 to $69 on news that AOL had extended its contract with Capital Cities/ABC, better known today as "Disney." The contract calls for ABC to launch a load of new forums, the most prominent of which will be an entire channel on America Online dedicated to fashion. The Fashion Channel will include information on the industry and will allow for interaction between designers, retailers, consumers and others interested in the industry. Hey, someone tell The Gap about all this!

Let's walk through a valuation of America Online, based on subscriber value, the standard by which cable companies have been and are valued. Before we do, though, how about two more quick information bits.

The Motley Fool is pleased to announce that, according to AOL sources, our motley assemblage of forums, from Fool Financial to Foolball to Follywood to Rogue, now makes us the 3rd largest information provider on the entire service, behind MTV and Cap Cities/ABC. Climbing rapidly, our subscriber base between all four electronic magazines sits just short of 200,000 monthly readers, and for those familiar with what is often the silliness of online counting. . . those numbers are not "clicks" nor screennames, but individual, unique accounts. America Online continues to be the most conservative online service when it comes to counting subscribership.

Point two. On a somewhat related note, The Washington Post ran what we believe to be a neatly slanted article yesterday on America Online's accounting method, maintaining that the Company needs "to sell stock periodically to meet its bills." Let's leave the accounting tangle of this out for now and just review how silly that assertion is. Today, America Online has 40 million shares outstanding, and the Company's President Ted Leonsis recently opined that AMER would do $1 billion in annual sales by June, 1996. Microsoft, with $6 billion in annual sales, has over 585 million shares outstanding, plenty from splits, but plenty from employee options and acquisitions.

The main point here is simply that rapidly growing companies are smart to issue new shares for acquisitions and to compel employees to tie their performance to company profit. Furthermore, it's in the BEST interest of Company shareholders---the Tribunes, Fidelities, Goldman Sachses and Fools---that salaries be tied closely to bottom-line profits. The Washington Post's assertion is a fine example of pedestrian financial thinking---drawing up a sweeping generalization to tackle a complex problem.

Note that in fiscal 1993, America Online had $40 million in sales and approximately 19 million shares outstanding. In fiscal 1996, the Company projects $1 billion in sales and presently has on the order of 40 million shares outstanding. That makes for a 28% annual growth rate in shares out, and a 192% growth rate in sales (read: market share, brandname, new-industry domination). To close, for those keeping score, Alan Sloan was The Washington Post columnist who offered up this gem; forgive us for noting that writer branding is growing ever weaker in the traditional media these days.

Now let's move to that subscriber valuation. Bear with us on all the numbers---it's worth it. And we think Fools would do well to learn this valuation for reference at cocktail parties across the nation!

America Online at last count had 3.5 million subscribers, having loaded on 800,000 new subs in the last quarter---the traditionally slow summer quarter. The lifetime (3-year) value of each subscriber sits around $725, meaning that our overall valuation of the Company, on subscriber value alone is 3.5 million subs x $725 per sub, or $2.54 billion. Notice that America Online, with 40 million shares out and a stock trading at $69 a share, is presently capped at $2.76 billion. So Wall Street is pricing America Online dearly, eh? After all, the valuation is $220 million higher than the sub-value---$2.76 billion minus $2.54 billion equals $220 million.

Ahh, but we need to factor in the unbelievable growth AOL is racing through. Foolish projections hold that as early as May 1, America Online could nail down its 6 millionth subscriber. If AOL grows subs at a rate of 800,000 per quarter that would put them at 5.1 million subscribers by March 7, 1996. Carrying that growth forward we might expect the 6 millionth customer to push through the doors sometime in June. But let's be real here. . . Christmas, 'tis the time of most rapid growth. Isn't it sad when a Fool has to cast a cold eye on the season of giving and note that consumer activity is most heated into the New Year? Ah well, it's true. And we expect America Online to thrive in the Winter months and possibly beat our May 1 projections.

Now let's be conservative and presume that the lifetime value of subs still sits at $725 in May, though it has been steadily climbing. So off 6 million subscribers at $725 each, we value AMER at $4.35 billion in May. Again, Wall Street is capping the Company at $2.76 billion today. That means that a Fool expects growth from $2.76 billion today to $4.35 billion in May, 1996, or 57.6% total growth. That would put the stock at about $109 per share then. We expect the market to be a little smarter by then, and wouldn't be surprised to see AMER trading in the $120 range.

And so, when CNBC's Joe Kiernan, a man who has noted America Online's great rise all the way up, says today on the one-way screen that this is a stock that has "continued to confound everyone," oh if only life were a bit more interactive and we could actually respond. It hasn't confounded Fools who have held it for 374% total growth since pulling the tarp off The Motley Fool Online Pinto back in August, 1994; the stock's growth has tracked one of the most astonishing, most rapidly-growing businesses in America just as we would have expected. But television is still one-way, so we sit at Fool HQ, half-smiling.

And if 57.6% growth for the stock over the next six months seems entirely unreasonable, just note that AMER stock has compounded 168% annual growth over the last three years. 57% growth into May would actually make for a slowdown over the past three years. A pretty nice slowdown, eh?

And there you have it, the valuation of America Online. If you have any questions about AMER, please post them to our stock folder. Now, time for a dinner and another market day 15 hours hence.

Fool on,

Tom Gardner, 10/24/95

Today's Moves

AMER +3 5/8 AMAT - 1/4 CHV --- GE - 1/2 GPS - 3/4 IOMG - 1/8 KLAC - 1/4 RIDE - 1/8 S - 1/2 SNIC + 5/8

Today's Numbers

Day Month Year History FOOL +1.24% 0.47% 52.86% 69.72% S&P 500 +0.26% 0.37% 27.72% 27.96% NASDAQ +0.22% -0.41% 38.20% 44.30% Rec'd # Security In At Now Change 8/5/94 340 AmOnline 14.55 69.00 374.36% 5/23/95 510 Ride Inc. 9.91 21.63 118.29% 5/17/95 335 Iomega Corp 15.11 24.88 64.58% 8/5/94 165 Sears 28.93 34.63 19.71% 4/20/95 155 The Gap 32.55 36.88 13.29% 8/11/95 95 GenElec 57.91 63.00 8.78% 8/11/95 110 Chevron 49.00 47.63 -2.81% 8/24/95 130 KLA Instrm 44.71 41.25 -7.74% 8/24/95 100 AppldMatl 57.52 48.25 -16.12% 12/23/94 340 SonicSol 14.48 9.50 -34.41% Rec'd # Security Cost Value Change 8/5/94 340 AmOnline 4945.56 23460.00 $18514.44 5/23/95 510 Ride Inc. 5052.44 11028.75 $5976.31 5/17/95 335 Iomega Corp 5063.13 8333.13 $3270.00 8/5/94 165 Sears 4772.65 5713.13 $940.48 4/20/95 155 The Gap 5045.25 5715.63 $670.38 8/11/95 95 GenElec 5501.87 5985.00 $483.13 8/11/95 110 Chevron 5389.99 5238.75 -$151.24 8/24/95130 KLA Instrm 5812.49 5362.50 -$449.99 8/24/95 100 AppldMatl 5752.49 4825.00 -$927.49 12/23/94 340 SonicSol 4924.18 3230.00 -$1694.18 CASH $5969.86 TOTAL $84861.74