Friday, December 11, 2009

AOL Goes Public...Again

A little less than 10 years ago AOL's market value was, unbelievably, over $ 160 billion. Once combined with Time Warner the market value of the 2 companies was over $ 300 billion.

AOL went public again today and is trading at around $ 23/share. At that price the company is currently valued at $ 2.4 billion...a 98.5% drop in value since back when it acquired Time Warner.

The funny thing is AOL may finally be fairly valued now though I certainly wouldn't touch it (At today's price AOL is probably selling at 5-6x current earnings...whether just a fraction of those earning will be around in 5 years is the question). So best case it's a cigar butt.

What a difference a decade makes.

When AOL bid to buy Time Warner who in either boardroom or within the senior leadership was thinking about Google?

From this MarketWatch article:

...few were even aware that a 70-person startup called Google had set out to show small advertisements alongside Internet search results. Just five years later, Google Inc. itself had become a heavyweight on the scene and it purchased a 5% stake in AOL from Time Warner, at a price of $1 billion. Four years after that, however, Google sold the stake back to a chastened Time Warner for $283 million, while maintaining control of the inner workings of AOL's search engine through a partnership.

Back in 2000 when AOL was valued at over $ 160 billion the company was earning approximately $ 1 billion per year giving it a PE of ~160. So, as an investor, you were paying $ 160 to buy $ 1 of earnings for a company with a suspect economic moat.

The contrast of AOL at the time with Google today is significant. Google will earn over $ 7 billion this year and is in a position to grow that substantially in coming years. So while Google's $185 billion market value is slightly higher than AOL's at the time, it's earning capacity is already 7x higher and looks more durable. It also has $ 22 billion of cash with no debt. Now that may not be cheap...but a case can certainly be made for that price in my view.

Most importantly, at least for now, Google appears to have a wide economic moat. Now whether that moat will become wider or shrink over time is much more difficult to judge considering how fast the world they operate in changes. Still, I wouldn't bet against them over the short to medium run.

Adam

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