EarthLink, Inc.
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52-week High Today

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By jnwillis
September 17, 2003

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Hmmm ... this is where I bought it last year ... it may be time to sell.

It's always tempting to sell when a stock that has lost ground rises back and you're "even", but unless the stock has just raced to some unreasonable valuation (which it hasn't, IMHO) it's best to try and forget the past and look exclusively toward the future and evaluate that stock in terms of a) what ELSE would I do with that money which would yield better; and b) how much risk are you willing to take on with that money. So the real question is where will the company/stock be a year from now, two years, etc., and if you had a big pile of money, would you consider buying more at the current price based on your research?

Earthlink has done a fair job the past couple years in sticking to their core business (a sign of disciplined leadership), whittling away at costs, and maintaining their subscriber base through a decent balance of marketing to gain new customers and providing good customer service to existing customers (it's not easy to find that balance). They have basically zero debt, and they still have that PeoplePC asset that they haven't really promoted much yet, probably because they don't feel a real need to. But, I think they've made mistakes by changing their marketing strategy too often and in the process not building name recognition, particularly in high speed access, but then I don't have access to the same market research data they do, so my opinions may be all washed up. I also don't see them effectively reaching small businesses to the extent that they could with competitively priced high-speed services.

Nevertheless, based on their past record, I'd suggest there's probably more room for gradual, long-term growth in the stock price, but as always, there will be bumps along the way and you have to watch things like a hawk. For example, if in the next few quarters they start ramping up marketing expenditures but don't start showing subscriber growth, that's a BIG concern. They probably don't have much room to raise prices, there may not be many more costs to cut, so their success now comes down to growing the subscriber base in a consistent manner.

In terms of numbers, last year's loss was a $0.22 per share; this year's consensus earnings estimate is $0.21 a share, and next year's is $0.33 - a good trend indeed if they can live up to it. For what it's worth, the positive earnings growth, the zero debt, and their reasonably competent approach to growing the business are my primary reasons at this point for sticking with this one.


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