Hey, have you noticed that Celera is now the largest holding in the Rule Breaker Port? In fact, Celera's value now accounts for 32% of the port's value, compared to AOL at 25% and Amazon at 19%. Sure, the Rule Breaker invested $50,000 in Celera and it only began with $10,200 invested in AOL and Amazon combined, however, it's still surprising that Celera has already become the largest horse in the stable. (Which stock will lead four years from now, when we revisit February 29? TUNE IN TO FIND OUT!!!)
Four years from now, you'll likely have broadband access to the Internet, whether it's DSL through your phone or cable running through your home. AOL and Time Warner (NYSE: TWX) nobly announced today that they would open their cable to all Internet service providers (ISPs), at least as much as is allowed by Time Warner's contract with Road Runner, its Internet cable provider. This announcement by Time Warner and AOL isn't done as an act of kindness. It is A SMART BUSINESS MOVE. (Sorry, it's a leap year day -- not a real day -- so I might randomly yell as indicated by using all capital letters.) Why is it smart business? Consider what AOL Time Warner has to gain, compared to what it could lose.
AOL is the largest ISP in the world, and it sports eight times more customers than the runner-up, EarthLink/MindSpring. When cable access is offered by a variety of ISP providers, AOL is hands-down most likely to be the ISP of choice for most users. It has the best brand and largest existing customer base. So, the fact that AOL Time Warner will open its cable doesn't put the company in harm's way in any serious manner. What its open cable DOES do, however, is pressure other companies, namely AT&T (NYSE: T), to open their cable. How can they not!? AOL Time Warner did! Come on! Open your cable or risk upsetting your potential customers, AT&T.
Once open cable access is the norm (after 2002 in the case of AT&T), AOL can sell its ISP service to the two-thirds of homes in the United States that Time Warner cable doesn't reach, as well as to its own cable network customers. AOL should easily succeed even when using other companies' cable networks, again because it has the best brand and largest installed base of customers.
You can bet that this strategy was thought out long before the Time Warner acquisition was announced. Just picture AOL executives thinking aloud around the table: "We get Time Warner's cable, which goes to 20 million homes in the United States. We open access to that cable, knowing that we'll still sign more Internet customers with AOL than anyone else, and by opening this cable, we put pressure on the competition to open their cable. Then we leap on that cable market, essentially the 80% of North America that we can't reach with Time Warner's cable."
Time Warner's cable properties are substantial enough to make such a plan work. They carry enough weight, being the second-largest cable network in the country.
At the Fool, we don't believe in price targets, especially near-term ones, but valuing companies is Foolish and in the process you can derive potential stock prices. AOL Time Warner could achieve EBITDA (earnings before interest, taxes, depreciation and amortization) of about $16 billion in 2004, and it could trade at 30 times EBITDA, which -- at current sharecounts -- would give the new stock a $99 price tag, up from AOL's $58 price today. Of course, this assumes that the merger goes well and that the company is able to grow 30% annually as management predicts, and that's a good deal to assume.
Therefore, you need to consider the risk-to-reward scenario if you're considering investing in AOL or Time Warner. At current prices, what is your downside risk compared to your potential upside reward? I believe that the risk-to-reward scenario could prove favorable from these prices. However, listening to me instead of making up your own mind would, of course, be very Wise.
Speaking of Wisdom, I believe that somebody Wise was playing a trick on eBay (Nasdaq: EBAY) yesterday. Just as eBay formally announced eBay Japan, a newspaper reported that eBay was interested in buying Sotheby's (NYSE: BID) for $1.6 billion. The prospect of such a large, off-line acquisition caused investors to sell eBay lower, apparently, before eBay could refute the claim. And eBay did refute it, claiming it had no interest in buying Sotheby's. Personally, I was relieved. Why? Because Sotheby's is a large, off-line business and the acquisition doesn't seem necessary for eBay, and because Sotheby's is being accused of price fixing. This price fixing claim was a new development this weekend, too. I hypothesize that this is what made some Wise person think to attach Sotheby's name to eBay's in order to harm eBay's stock. (Should I stop watching Oliver Stone films?)
A lesson for investors: If a company issues a statement that it is NOT interested in a rumored takeover candidate (as eBay did), 99% of the time it indeed is NOT interested. If a company remains adamantly quiet about a takeover rumor, the rumor has a better chance of proving true. But a company will not go out of its way to refute a rumor (it will simply say "no comment") unless it means what it says. So, according to eBay it won't bid to acquire Sotheby's.
Why would somebody "leak" the Sotheby's rumor to a newspaper? To make eBay's stock go down, most likely because they were betting on it to decline, or to make Sotheby's rise even in light of the bad news that surfaced over the weekend.
Wisdom abounds. Now consider Amazon (Nasdaq: AMZN). Barron's ran an article last weekend claiming that Amazon's customers weren't spending as much money as Amazon reported if you measure customer spending on a daily (or weekly) basis. The caveat: the guy presenting the argument owned large amounts of "puts" on the stock, meaning that he was betting on the stock to decline. The lesson here is that you can make math say almost anything you want, good or bad. Take math that is presented as an investment conclusion with a large grain of salt. (Including math that you see here.)
So, our lessons on this leap day:
- Open cable at Time Warner/AOL is a smart business move, not an act of kindness.
- If a company goes out of its way to refute a rumor, it is usually telling the truth -- meaning the rumor isn't true or even close to coming true.
- Math can be made to say almost anything. Focus on a company's total business quality, not minute, moldable statistics.
Amazon, eBay, AOL -- oh no!
Paul Larson and I answered several questions from investors about e-commerce, namely Amazon, eBay, and AOL on the Multex website. Check it out!
Finally, what will life be like in 2010? Read "NY Crew Guy's" Foolish post, titled In the Year 2010, for his predictions.
See you on the RB discussion boards linked below. Fool on!
