AOL CEO Tim Armstrong went out of his way to reduce expectations on the roadshow…and Wall Street bought it!
The smart money is now smugly in agreement that AOL will dwindle away to nothing. And it might. But not before it surprises on the upside, gushes out more cash than its current market value, and makes today’s contrarians a nice return.
We’ll explain below.
But first, a reminder of where things stand:
AOL’s standalone stock is now trading for $23. There are about 106 million shares outstanding, so the market cap is $2.4 billion. AOL’s revenue next year should be about $2.5 billion, and its cash flow should be at least $700 million. So the stock is trading for 1X revenue or 3X cash flow.
Now, if the company does nothing but slowly go out of business over the next few years, 1X revenue and 3X cash flow could be too much. But not WAY too much–let’s be serious here. More likely, even if the company does go straight out of business, it will spit off more than $2.4 billion of cash in the process.
And we actually don’t expect AOL to just quietly go out of business. More likely, here’s what Tim & Co. will do:
- Sell off everything that doesn’t support the vision of Time Inc. for the 21st Century. This should be at least $1 billion-worth of stuff. So you’re going to get almost half your cash back right there.
- Buy anything affordable that does support the vision of Time Inc. for the 21st Century. There’s plenty of cheap stuff out there. And there are no big players yet. And AOL has a huge advantage with paying subscribers, an email salt lick, and a massive portal.
These two things alone should allow Tim & Co. to generate more than $2.4 billion over the next few years. Print is still dying, don’t forget. And content isn’t going away. So building the right platform to become the Time Inc of the 21st Century just isn’t that stupid an idea.
And then there’s the surprise potential upside.
- Try like hell to figure out something, anything, that you can give the remaining 6+ million ISP subscribers to keep them paying you every month. Don’t laugh. Every publication on earth is trying to figure out some sort of subscription revenue stream. AOL is in a great position to roll up some of this content, make it available to its subs, and pass a royalty back to the content providers. And then there are potential buying clubs. Or private sales. Or other membership benefits. There are any number of things that AOL might be able to come up with that will make the remaining subs stick around, even if they’re not using the ISP.
If Tim & Co. can nail that last thing, you’re golden. If they just get the 21st Century content platform right, you’re in good shape. If they blow both of those things, you’re probably fine.
So go ahead and snicker, smart money. Tim & Co. have you right where they want you: Ready to be positively surprised.
Disclosure: Henry Blodget has been dragging the bag of rocks known as TWX around for more than a decade. So he’s now a proud owner of AOL again…at 1996 prices!
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