America Online (NYSE: AOL) provides the most-used connection to the Internet and is the leading online content property in the world. The Big A announced first quarter fiscal year 2000 revenue of $1.467 billion, up 46.8% from $999 million last year, while earnings per share (EPS) landed at $0.15, resulting in net income of $184 million.
There are a few key metrics that we always look at with AOL. First is AOL's high-margin commerce and advertising revenue. Although member subscriber fees account for most of AOL's revenue (so far), most of AOL's net income is derived from commerce and ad revenue. The company announced that this important revenue number doubled to $350 million this quarter, while AOL's commerce and ad revenue backlog continued to balloon, topping $2 billion. AOL has 18.7 million worldwide subscribers that other companies happily pay millions (and millions) of dollars to reach. AOL commerce and ad clients include:
Company Contract Size FirstUSA $500 million Travelocity $200mm American Greetings $100mm drkoop.com $89mm eBay $75mm Medscape $33mm eToys $18mmAdd hundreds of other companies to the list, a growing subscriber base, and a trend of more and more hours spent online by users, and we have a long-term business model that could shine ever brighter.
AOL has the most lucrative real estate on the Internet, surpassing Yahoo! when measured by "real estate" sales. The quarter prior to this one, AOL earned $276 million in ad and commerce revenue, compared to Yahoo!'s $129 million. AOL's dominance in this category won't likely dissipate anytime soon. Clients are said to be most happy advertising on AOL, sharing that AOL delivers the best results for the ad dollars. Over 90% of commerce and ad partners (in fact, up to 96%) renewed their ad or commerce partnership with AOL last year.
Although high-margin ad and commerce revenue will drive earnings in the coming years, this revenue stream is dependent at least partially on a growing subscriber base, so subscriber numbers is what we look at next. AOL broke its first quarter record by adding a net 1.1 million subscribers this quarter, ending with 18.7 million AOL subscribers worldwide and 2.2 million CompuServe members. This keeps us happy. AOL added more subscribers in one quarter than most would-be competitors have total.
We next look at profitability and cash flow measures. AOL's gross margin (which is net revenue minus cost of goods sold) was 46.0% this quarter, continuing a several-quarter upward trend. This is good, too. The business is becoming more efficient and more profitable. Meanwhile, AOL's free cash flow (money that is available for use after all is said and done) was $320 million this quarter compared to just $47 million last year. America Online ended the quarter with $1.33 billion in cash and equivalents, which compares to $887 million last year. Following a quick study, the company's cash flow statement and balance sheet look healthy on all measures.
If we want to throw some sort of "snapshot in time" valuation on the company, we can try. First, AOL has a commerce and ad revenue run rate (last quarter sales multiplied by four) of $1.4 billion. This revenue is typically and rather "safely" granted a 20 times multiple when valuing it, giving us $28 billion in company value.
Next, AOL has 18.7 million subscribers that I'll estimate as worth $1,800 apiece. This is a higher valuation than we've granted in the past, but the value is increased because the users are staying online longer and are using the service more. This $1,800 member value multiplied by the number AOL members present gives us $33.6 billion in company value. CompuServe members we'll value at $1,400 apiece, for $3.0 billion more in value. Finally, we add the $1.8 billion in cash and short-term investments to the mix. All these big ole numbers give us a total current value of $66.4 billion. (See "How to Value Stocks" on member-based value models for more on this method.)
Partly because stocks trade on future expectations more than on present strengths and weaknesses, AOL's stock is valued at about $130 billion now, well above the $66 billion hypothesis. When you slap growth rates on AOL's current results, especially on its ad and commerce revenue, you might conclude that investors are simply looking ahead two to three years in valuing AOL at its current price. Typically, investors do try to look ahead, so this current valuation seems -- gasp, flame me -- reasonable. Especially when you consider the added value that should be paid for the leading online brand in the world.
This said, I wouldn't buy the stock unless I planned to own it for at least five years. At this valuation, the stock could slap ya if you're holding it for any time less, even though everything looks groovy following this quarter. If you wish to discuss AOL from a Rule Breaker point of view, please visit us on the Rule Breaker Companies board.
Amgen (Nasdaq: AMGN) also announced results that topped estimates. It reported earnings of $0.50 per share after one-time gains, which was up 19% from last year, while revenue grew 20% to $769 million. Amgen's two main drugs, Epogen and Neupogen, are oxygen rich, growing 28% and 9%, respectively, year-over-year. (OK, Neupogen could use a little more red blood cells to give it more energy.) Amgen's stock is reportedly down in after-market trade because in its conference call management projected earnings per share growth in 2000 in the low double-digit range, down significantly from this year's surprisingly high pace, though still very respectable.
Amgen's stock has jumped 95% since last December, reasonably granting room for a downward slip on anything less than happy-go-lucky news. Management's prediction for next year's EPS doesn't change our mood on the investment, however. We know that the company needs to introduce new and largely successful drugs to keep growing at a 15%+ pace, and we believe that Amgen has the resources and the management to succeed to such a high degree.
Amgen also announced another two-for-one stock split, which will take place on November 19 after the market closes.
This column began by mentioning that AOL and Amgen both have plans for their cash. One plan: AOL will invest $800 million in a partnership with Gateway Computers (NYSE: GTW), and Amgen announced a $2 billion stock repurchase plan.
Finally, do you find financial and bank companies difficult to understand? In Drip Port today we work to explain how to analyze Mellon Bank's (NYSE: MEL) quarterly report. Mellon is the company that we decided to buy after a six-month study of several leading bank stocks.
- America Online conference call info
- America Online Q1 FY2000 press release
- America Online message board
- Amgen Q3 press release
- Amgen message board
- Rule Breaker Companies message board
As always, share any thoughts about tonight's recap in our Rule Breaker Strategies board. And if you are looking into, or for, any new Rule Breaker prospects, the conversation always continues on our Rule Breaker Companies message board.