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September 20, 2000
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(note: this post was written prior to knowing about GB's resignation)
Following this board for 6 months now has been enlightening. I am currently long both ATHM and T at cost basis' of approximately $17 and $33 respectively. The primary reason for the low cost basis has been regular additions to my positions as the stocks have declined, particularly in the last few weeks. Combined they represent about 20% of my portfolio. I hope I'm done accumulating near term and hope to ride the broadband wave to a very good couple of investing years.
With that said, I always painfully chuckle to myself when I read posts that imply ATHM is a sure thing or that without question it is at its low and only a fool (small or large F) would sell now. I understand the nature of the board as I've been reading the Fool for over 5 years now. I know to write 9 glowing things about the stock and one questionable item is tantamount to treason and the fast ticket to many people's penalty box. Simply put, I own ATHM with the understanding that risk is part of the deal. Many things make me nervous about this stock. A partial list includes:
1) Competing Technologies. Cable might be the best positioned right now, but I own ATHM with the knowledge that technologies change and the best technology doesn't always win.
2) AT&T control. I have believed strongly that AT&T assuming firm control was in the best interest of the company, but the events of the last week bother me. Interested in short term actions to boost their stock price, the AT&T board is meeting this week to discuss huge issues such as mergers and divestures. Will any of these issues effect ATHM? Only time will tell, but I will bet that George Bell and other senior managers spent at least a few minutes around the water cooler pondering what the outcome might be. That's a few minutes that weren't spent getting the self install kits out, putting pressure on the cable companies to roll more trucks, or fixing whatever is stalling Excite's growth.
3) Potential Government Intervention. Maybe I don't get it. But I swear I see in a lot of posts that it is in ATHM's best interest for the government to approve the merger of AOL/TW contingent upon the merged company opening access to its cable internet infrastructure. As is often pointed out, ATHM has twice the exclusive footprint that AOL/TW has. Does anybody really think that the government is only going to create open access requirements for the second largest exclusive cable internet provider and not bother with the largest? As an ATHM owner not particularly worried about paying a few extra dollars a month for access, I would personally love to see the government stay the heck out of it, let ATHM build a huge subscription base and then let the competition come.
4) Cable Companies. I'm 34 and have had cable TV in either my parents home or my homes for about 19 years now. I'm trying to think of one positive customer service experience I ever had with any cable company. I can't. These companies abused their monopolies for years with poor service and price increases outstripping inflation. Things change, but I have this strange fear that some of the same fatcats are sitting in their corner offices and still don't get it.
5) Contrarian Sentiment. An article posted this week commented that 33 out of 36 analysts covering ATHM had it rated one of their two highest ratings. A fair question for those that understand these things is� if everybody already thinks this is such a great stock, who's left to buy it? Either those three remaining analysts carry an awful lot of weight or the market just accepts that analysts are just salespeople and recommend everything these days. Regarding target prices set by analysts�. HA HA HA.
6) Excite Revenue Stagnation. Nico did an outstanding job highlighting this issue. While subscriber revenue increased 20% last quarter, ad revenue was flat. Like it or not, there are two significant parts to the company. Broadband ISP is only one. Additionally, the Excite properties dropped a spot in total pageviews to Disney. In short, there's not a lot of buzz in the internet world about the Excite portal or any of its subsidiaries. My hope is that Excite is focusing on being the best broadband portal, willing to sacrifice today for a brighter tomorrow. That's the hope at least.
7) Purchasing Pogo.com. I just don't get this one. I've thought about it. I spent a few hours on the website playing Hearts (I even won a couple times) and I just don't get it. First, I fail to see how Hearts and Checkers are broadband applications. I participated on my measly little 56k dial-up without any problem. Second, my instincts tell me that my grandparent's games are not going to steal the attention of teenagers away from Doom style games. I've been in Internet caf�s over much of Eastern Europe this year and while I see people waiting in line to play shoot-em-up games, I never once saw a person playing Cribbage. What irks me also is that we paid $150 million for this site. Now I know that in 2000, that's hardly even considered money, but maybe I'm old enough to remember when that was serious cash. Career wise, I'm involved in providing offshore programming for companies. This is a perfect project for foreign programmers because you can point to a million examples and say.. "we want this networked on the web." I estimate I could get the entire site built for less than $750,000. Maybe I'm way off, double it. Maybe I'm still way off, double it again. Mabye I'm still way off, double it again. Say it took $6 million to build this site. In essence we paid $144 million for the current users. But if you believe that internet advertising is an effective medium (questionable), then shouldn't Excite and family be able to build it's own site name awareness and usage?
8) Pricing Power. This one probably should have been number one. That three industries are going after the same customer and that eventually there will be competitors within ATHM's niche means that eventually pricing will be competitive. AT&T is already starting the games by offering free months sevice. It is sometimes mentioned on here that one of the reasons why Cable is better than DSL is because it is cheaper. Well, the phone companies could change that in about one day. Somehow AOL is managing to hold onto it's customer base while charging more than it's competitors, so maybe there is hope.
Quote from Ronald Baron in his recent annual report for on his Internet fund:
"This brings us to the business models of the many companies attempting to profit from the explosive demand for broadband connectivity. As we noted above, we view bandwidth like oil, the fuel of the information economy � however, like oil, it becomes subject to commodity pricing. It is difficult to differentiate one barrel of oil from another if they are of the same grade. Similarly, a broadband connection from one provider with the same bandwidth as another's can become indistinguishable. As portions of bandwidth provisioning become more commodity-like, returns on capital for the vendors of bandwidth will deteriorate as the only mechanism for competition becomes price. We believe that this trend can already be seen in certain long haul fiber carriers and the embedded long distance voice providers."
9) Stock Dissolution. Excuse my laziness as I've never bothered to actually calculate out the percentage of the potential dissolution. I've sort of played the ostrich on this one and stuck my head in the sand, but I know it's out there. The current contracts call for issuing 2 additional shares for each cable subscriber. (If I'm not mistaken� that's cable TV, not internet though their cable connection) to the cable companies. Nothing like being in a stock split, but not receiving your additional shares.
10) General Market Valuations. Not often metnioned on these boards � the prospect that stocks are plain expensive right now. I'd love for this economic expansion to go on another decade or two, but 4 years of business school taught me about cycles. By most historical standards, stocks are priced high and will either correct or will go through a prolonged period of stagnant growth. Within that possibility, ATHM is a company with a $6.5 billion market cap (as of this writing) and no profits. My fingers are crossed that the profits will come the 4th quarter as recently stated by management and then we will see a steady ramping up of them. EVENTUALLY� the price of the stock will have little if anything to do with subscribers, page views and self install kits, but will have almost everything to do with what the company is earning after it's expenses. ATHM subscriber growth rate is amazing, but it's got to start translating to profits at some point. If not� "look out below."
There's more, but needless to say I don't think ATHM is a sure thing. So why am I invested? For starters, I don't think I'm smart enough to think that I'm the only person who has thought of these issues. I believe that the market overcompensates sometimes on both good and bad news. In this case, I think ATHM's chances of success are much brighter than many investors think, thus an opportunity. It's about upside. The potential to me is much higher than the risk� but oh there's risk!
I fundamentally believe that if we have 10,000,000 "domestic" subscribers by the end of 2002 we will be worth more then than we are now. I am perhaps most excited about the international opportunity. I spend a lot of time in Moscow. In my rented flat, I paid $60 a month for horrid dial-up service. By horrid, I mean WHEN I was able to get on, the reported speed was usually 14,400, but the actual speed was a fraction of that. My friend down the street owns a software consulting company and I would often wander down and use his ISDN connection I measured out at 93k per second. Would anybody here believe that he is paying $700 a month for this service? Cable is coming next month pre-advertised at $40 a month. I don't even know if Chello is involved in Russia, but this is but one example.
Lastly, I am a believer in brands. And I think AT&T has about the biggest baddest brand out there. Brands play their biggest role after an economic slowdown when some of the weaker players are shaken out. I'm in this for the long haul, not just to see if we hit 3 million by December 31st. Over time� brands matter! At least that's what I keep telling myself.
I'll just introduce myself around to my new friends in the penalty box,
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