...from the inside flap of a Fool book
by Bill Swails
LITTLETON, CO. (Aug. 5, 1998) -- Given the recent anniversary of The Motley Fool Online, and the relatively quiet (albeit volatile) stock market that lacked company news today, now is a excellent opportunity to share a personal experience that I had with the Foolish Gardners two years ago.
I first met founding Fools, David and Tom Gardner, on March 27, 1996, at the Tattered Cover bookstore in Denver, Colorado. Along with many other Fools, I was attending a signing for their newly published book, The Motley Fool Investment Guide.
Since both the Fool Portfolio and my personal portfolio had been quite successful with investments in America Online (NYSE: AOL) during the year and half prior to our meeting, I thought it would be interesting for us to make predictions on AOL's future. I hung around until most of the other Fools had wandered off, and persuaded David and Tom to make guesses at AOL's market capitalization and number of subscribers on January 1, 2000. After a brief, whimsical mental analysis, we each transcribed our thoughts on the inside cover of my book.
These Foolish predictions were not the typical prognostications you see the Wise analysts make. We were, at best, making educated guesses based on our experiences. Tom illustrated the playful nature of his predictions, and a general skepticism of long term forecasts, by writing that AOL would achieve his numbers on January 1, 2000, at precisely 3:22 PM!
So what is the value today, of a little guessing game conducted a couple of years ago, that made predictions for a date that is still a year and a half away? The value is in looking at the direction and magnitude of our predictions, and the foundation on which they were based. I doubt that any of us at the time had a high level of confidence in our actual numbers, but I'm sure that we all would have agreed that AOL was going to be much larger by the year 2000 than it was in March of 1996. The big question was: How much larger?
Before I reveal our predictions, remember that in March of 1996, AOL only had about 5.5 million subscribers, which is about one-third of today's subscriber base of nearly 15 million. AOL's market capitalization in March of 1996, was only $5 billion, or almost one-fifth of its current market cap of around $24 billion. Today, our predictions don't look all that unreasonable, but at the time these predictions were made, I'm sure that members of the Wise off-line investment community would have scoffed at our collective delirium!
At the time of our predictions, the Fool's investment in AOL had gained a whopping 640% over the previous 20 months! Over the previous 16 months, I had invested my portfolio in AOL stock and was sitting on a 125% gain. To say that we were AOL optimists is an extreme understatement. Understandably, we all predicted significant increases for AOL's market capitalization and number of subscribers. Without further fanfare (drum roll pleaseï¿½), here are our AOL predictions made on March 27, 1996, for January 1, 2000:
Number of Market Cap Subscribers --------------------------------------- Tom Gardner $19 billion 22 million David Gardner $35 billion 35 million Bill Swails $40 billion 40 million
The year 2000 is over 16 months away, but as of market close today, August 5, 1998, Tom's market cap prediction for AOL has already been surpassed by $5 billion! Yet, in the not too distant past, we have seen drops in AOL's market cap of 66% or more, so it's far too early to rule Tom out as a potential winner of this little game, but my personal feeling is that all three of our market cap projections will be "blown away." A doubling of market cap in 17 months would put it at $50 billion -- and it certainly wouldn't be the first time AOL's market cap has doubled over an 18 month period!
It also still too early to call a winner in the subscriber number prediction, but if the current growth trend continues, the number of AOL subscribers will probably double to around 30 million by the year 2000, in my opinion. It will certainly be entertaining to take another look at our predictions when the ball drops on January 1, 2000.
Our predictions weren't complete guesses, because we obviously all performed the quick mental calculation of dividing the market capitalization by the number of subscribers to ensure that our subscriber valuation numbers were reasonable. Our predictions implied a value per subscriber ranging from $863 to $1,000, which was a typical valuation given to AOL subscribers at the time, since subscriber fees were AOL's primary revenue source. Today's actual value per subscriber is around $1,300 to $1,600, which recognizes the increasing importance of advertising and transaction revenue to AOL's business model. If the number of subscribers continues to grow, and the value of each subscriber continues to increase, the stock price of AOL will continue to rise.
These words, from the Initial Fool Flash Report on America Online posted on August 4,1994, are as relevant today as they were then:
"America Onlineï¿½ is the premier investment play on cyberspace."
This didn't stop the stock from declining today, though -- perhaps it's the old, "buy the rumor, sell the news" syndrome. Announced yesterday, AOL's results were strong in the recent quarter and for the fiscal year that just ended. For the audio replay of the conference call, visit http://www.broadcast.com. If you don't have software to listen to the recording, you can download it for free at the site.
Foolishly long AOL,
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Day Month Year History Annualized FOOL -2.12% -5.21% 39.40% 367.84% 47.07% S&P: +0.87% -3.50% 11.44% 135.91% 23.93% NASDAQ: +0.13% -4.51% 13.86% 148.27% 25.52% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 107.50 2856.19% 9/9/97 580 Amazon.com 19.11 106.19 455.64% 5/17/95 1960 Iomega Cor 1.28 4.88 280.74% 10/1/96 84 LucentTech 23.81 90.38 279.60% 8/12/96 130 AT&T 39.58 57.50 45.28% 4/30/97 -1170*Trump* 8.47 6.25 26.20% 2/20/98 200 Exxon 64.09 66.19 3.27% 2/20/98 215 DuPont 59.83 61.75 3.20% 2/20/98 270 Int'l Pape 47.69 43.00 -9.84% 7/2/98 235 Starbucks 55.91 39.00 -30.24% 8/24/95 130 KLA-Tencor 44.71 27.69 -38.08% 8/13/96 250 3Com Corp. 46.86 24.75 -47.19% 1/8/98 425 3Dfx 25.67 13.38 -47.89% 6/26/97 325 Innovex 27.71 12.50 -54.89% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 76325.00 $73743.13 9/9/97 580 Amazon.com 11084.24 61588.75 $50504.51 5/17/95 1960 Iomega Cor 2509.60 9555.00 $7045.40 10/1/96 84 LucentTech 1999.88 7591.50 $5591.62 4/30/97 -1170*Trump* -9908.50 -7312.50 $2596.00 8/12/96 130 AT&T 5145.11 7475.00 $2329.89 2/20/98 200 Exxon 12818.00 13237.50 $419.50 2/20/98 215 DuPont 12864.25 13276.25 $412.00 2/20/98 270 Int'l Pape 12876.75 11610.00 -$1266.75 8/24/95 130 KLA-Tencor 5812.49 3599.38 -$2213.12 7/2/98 235 Starbucks 13138.63 9165.00 -$3973.63 6/26/97 325 Innovex 9005.62 4062.50 -$4943.12 1/8/98 425 3Dfx 10908.63 5684.38 -$5224.25 8/13/96 250 3Com Corp. 11715.99 6187.50 -$5528.49 CASH $11876.47 TOTAL $233921.72